PremiumThe Reserve Bank of India (RBI) is currently working towards a phased implementation strategy for a central bank digital currency (CBDC) and examining use cases to ensure there is little or no disruption, deputy governor T Rabi Sankar said on Thursday.
According to Sankar, some key issues under examination are, whether CBDCs should be used in retail payments or also in wholesale payments; whether it should be a distributed ledger or a centralized ledger; whether direct issuance by the RBI or through banks and the degree of anonymity it would provide.
“However, conducting pilots in wholesale and retail segments may be a possibility in near future," said Sankar, speaking at a webinar organized by the Vidhi Centre for Legal Policy.
CBDC, he said, is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade. In line with the central bank’s concerns around cryptocurrencies, Sankar said that 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," he said, adding that a CBDC is the same as currency issued by a central bank but takes a different form than paper or polymer.
A central bank digital currency is therefore a sovereign currency in an electronic form and would appear as liability (currency in circulation) on a central bank’s balance sheet. A 2021 survey by the Bank for International Settlements (BIS) found that 86% of central banks were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects.
He explained that the reason behind this surge in interest is because many central banks are seeking to popularize a more acceptable electronic form of currency, while some jurisdictions with significant physical cash usage want to make issuance more efficient. There are other central banks that want to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies. Another major benefit of such a digital currency over traditional digital payments, he said, is that payments using CBDCs are final and thus reduce settlement risk in the financial system.
“India’s high currency to gross domestic product (GDP) ratio holds out another benefit of CBDCs. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced," said Sankar.
That apart, CBDCs can also cause a reduction in transaction demand for bank deposits. Since transactions in CBDCs reduce settlement risks, they reduce the liquidity needs for settlement of transactions and by providing a genuinely risk-free alternative to bank deposits, they could cause a shift away from bank deposits which in turn might reduce the need for government guarantees on deposits.
However, if banks begin to lose deposits over time, their ability for credit creation gets constrained, he said. That said, there is another risk of CBDCs that could be material. Availability of CBDC makes it easy for depositors to withdraw balances if there is stress on any bank and therefore flight of deposits can be much faster compared to cash withdrawal.
“On the other hand, just the availability of CBDCs might reduce panic runs since depositors have knowledge that they can withdraw quickly. One consequence could be that banks would be motivated to hold a larger level of liquidity which could result in lower returns for commercial banks," said Sankar.
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