RBI making way for a digital currency that could play a catalytic role in innovation.
Digital payments have evidently become the order of the day. There is an ease of payment, it is hassle-free, and it helps us live a cash-free existence! There is no better time than now, for a full-scale Central Bank Digital Currency (CBDC) to be introduced in India. Coincidentally, the RBI made an announcement on a pilot rollout of its digital currency! The technological revolution has impacted the financial systems and now India is taking the leap!
In 2018, the RBI had banned all regulated banks from holding or facilitating cryptocurrency transactions as per a 2020 Supreme Court order. But following a petition by the Internet and Mobile Association of India (IAMAI) and crypto exchanges, this controversial decision was reversed.
The RBI Deputy Governor, T. Rabi Sankar has now hinted at the RBI kicking off the digital currency pilot programs as early as December 2021. While we celebrate this decision, it is also important to understand the CBDC and its merits.
As an approved practice central bank has issued currencies that have been in circulation for centuries now. In recent years we have seen an explosion of private, digital currencies starting with Bitcoin, which essentially started as an anonymous mode of transaction and store of value outside the banking system and without jurisdictional restrictions. CBDC essentially is bringing the best of both worlds together – the first two letters, CB – represent the legitimacy of the currency as it is backed by the Central Bank, and the last two, DC – the use of cutting edge blockchain technology for today’s digital world.
With the CBDC, there’s good news for both the citizens and the government. CBDC directly connects the central bank with citizens leveraging blockchain and thereby mitigating the need for multiple financial intermediaries for money flow. This means two things: lower transaction costs for end-users, as well as immunity of money held in the currency to events like bank failures, etc as the currency is directly controlled by the central bank. For citizens, CBDC can lead to cheaper (as mentioned above), faster and safer (instant payments facilitated by blockchain) transactions. For the government, CBDC could help easily control monetary policy and provide timely relief measures in unforeseen situations like the pandemic (which necessitated financial relief packages), and also track tax collections more efficiently with little scope for leakage. Not just that, financial inclusion which has been a major roadblock for many parts of the country can be fast-tracked, through direct transfers to citizens’ mobile phones, and at a very low cost without investing in expensive branch infrastructure in far-flung areas. Also, it is very much possible to prevent financial crime with CBDC, because of the digital nature of the transactions and the presence of a public ledger.
After having discussed the advantages of CBDC, let’s look at a few concerns that we all might have about the new currency. Should the RBI adopt a retail model (related to payments made every day to/by individuals) or a wholesale CBDC model (restricted to transactions among banks)? What are the global standards for the CBDC and to what extent will the RBI customize them to the Indian context? What would be the implications on Foreign Exchange?
The RBI too has expressed concerns regarding cryptocurrency with respect to issues such as money laundering and terrorism financing. While enabling the required legal framework is one of the solutions to avert these issues, concerns regarding validation mechanisms such as token-based or account-based, distribution architecture, level of anonymity, and others also need to be addressed.
It is also imperative to acknowledge that this decision comes at a critical point when slowly but steadily, the Indian rupee is strengthening and finding more acceptance amongst global peers. As India moves towards digitization in its true sense, RBI-endorsed digital payment systems such as RuPay and BHIM UPI have gained widespread acceptance in the country. On September 14th, 2021, the governments of India and Singapore have announced the linkage of India’s UPI payment system, the Rupay card network with Singapore’s PayNow system for instant, low-cost transactions. When implemented, the CBDC could be a force multiplier to such efforts as digital currencies can be much more easily tracked and transacted across borders.
Grapevine on the government’s plans to tax cryptocurrency transactions (1) hints at RBI being open to the notion of digital currency and a possible co-existence of private cryptocurrency and RBI-issued CBDC. Issuing a CBDC is a national choice and each of us will have a point of view. While I fully support and stand by the decision of a CBDC, varying views on this subject must be heard as well. That being said, the financial future is in capable hands and the RBI can be fully trusted to get India ready for the economy of tomorrow, today.