CBDC; digital currency put forward by RBI

The Reserve Bank of India is likely to soon kick off pilot projects to assess the viability of using digital currency to make wholesale and retail payments to help calibrate its strategy for introducing a full-scale central bank digital currency (CBDC).

India is already a leader in digital payments, but cash remains dominant for small-value transactions, he said, stressing that an official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.

“Every idea has to wait for its time, perhaps the time for a CBDC is here,” RBI Deputy Governor T. Rabi Sankar said on Thursday. “Like other central banks, we have also been exploring the pros and cons of this since quite some time,” he added. A high-level inter-ministerial committee set up by the Finance Ministry had recommended the introduction of a CBDC with changes in the legal framework including the RBI Act, which currently empowers the RBI to regulate issuance of bank notes.

Transacting with CBDC would be an instantaneous process as the need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another, Mr. Sankar pointed out. Moreover, foreign trade transactions could be speeded up between countries adopting a CBDC. “India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC — to the extent large cash usage can be replaced by CBDC, the cost of printing, transporting and storing paper currency can be substantially reduced,” Mr. Sankar said at a discussion hosted by Vidhi Centre for Legal Policy. CBDC will be India’s sovereign currency in an electronic form.

According to the RBI deputy Governor, since CBDC is a currency that does not pay interest, its impact on bank deposits may “actually” be limited.“Depositors that require CBDCs for transactional purposes are likely to sweep day end balances to interest-earning deposit accounts,” he said.

However, he said that CBDC is not comparable to the private virtual currencies that have mushroomed over the last decade. He said, “Private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value; some claims that they are akin to gold clearly seem opportunistic.”

Complements fiat currency?

Sajai Singh, Partner at J Sagar Associates, said, “RBI is moving in the right direction with regard to digital currencies. Any RBI backed digital currency will come with a promise of less volatility and greater security for the bearer of the same. This will be very different from cryptocurrencies, like Bitcoin and Ethereum, which are rather popular, but carry innumerable risks. Also, RBI’s support to a digital currency will ensure its financial stability. It will be similar to say a potential digital Euro and digital Yuan.”

FaTE of crypto’s

According to Patel, CBDC’s might have a negligible direct impact on private digital currencies such as Bitcoin, Matic, Doge, etc. These private cryptocurrencies are based on ‘decentralization’. “The sovereign digital currencies are in stark contrast to decentralization, as the central banks govern and control them. However, as and when CBDCs start gaining more adoption, people would get to learn more about private cryptocurrencies as well. It would indirectly act as a catalyst to creating awareness of the practical usage of cryptocurrencies. That is when the crypto markets would start getting increased retail participation as well,” he told FE Online.