CBDC: Should The RBI Wait Some More?
The India Commentary view
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By Our Editorial Team
First publised on 2022-02-05 15:08:27
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The India Commentary view
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Finance Minister Nirmala Sitharaman announced in her Budget speech that the Reserve Bank of India (RBI) would come out with digital/virtual currency in the next fiscal. None of the major countries have come out with a central bank digital currency (CBDC) yet, although many are looking at the possibilities. As per a report of The Atlantic Council, as of now only 5 small Carribean countries have issued CBDC while 14, including China, South Korea and Sweden, have launched a pilot project. For another 48 countries, the CBDC is in the research and development phase. This is mainly because issuing CBDC is a challenging task in terms of setting up the design, deciding on ways of distribution and for India, deciding how it will be part of the banking system. Then there are implications on monetary policy and control that need to be studied.
In terms of design, will the RBI go for its centralized ledger system or use the decentralized system of blockchain technology used by the private players? The centralized ledger will provide control while the decentralized system is more efficient. The RBI will obviously study global developments and choose what is best for India.
There is no doubt that CBDC will save costs in printing, storing and distributing currency notes. But will the RBI issue CBDC for the wholesale segment (which does business only in digital form even now) or will it do it for the retail segment too? If it is open to the retail segment, will it be a part of the banking accounts already held by people or will new accounts have to be opened? Where will these accounts be opened? Will CBDC deposits earn interest? If so, what effect will it have on the deposits held by commercial banks? Will bank deposits move to CBDC deposits? If so, how will banks lend money without the backing of deposits?
CBDC will be an alternate payment system that will is not likely to involve the central clearing system of the RBI as it will be stored digitally and maintained through blockchain technology. It will be extremely useful for cross-border transactions as payments could be made in real time. But it is doubtful if it will be useful for the common citizen who already has several digital options on his or her mobile phone. Further, a major part of the buzz surrounding cryptocurrency (apart from the benefits of the blockchain technology) in the retail segment is due to the fact that they can be traded like assets (thus affording a chance to gain through speculation) and offer anonymity. CBDC issued by RBI will not afford either.
