How will RBI’s CBDC impact bank deposits, payments and private cryptocurrencies? 5 points

Representative image. Reuters

Many things you know about money or how you have transacted it are set to change in near future as the RBI thinks the time for CBDCs is nigh! The Reserve Bank of India (RBI) is planning to introduce India’s own Central Bank Digital Currency (CBDC) in a phased manner, which will not just seek to curb “damaging consequences” of private virtual currencies but may also impact bank deposits. CBDC will be India’s sovereign currency in an electronic form.

Speaking at a webinar organised by Vidhi Centre for Legal Policy on Thursday (22nd July 2021) , RBI Deputy Governor T Rabi Sankar the central bank is “currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption”. RBI is currently examining the scope of CBDCs, the underlying technology, the validation mechanism, distribution architecture and degree of anonymity etc. “However, conducting pilots in wholesale and retail segments may be a possibility in near future,” he said.

The RBI Deputy Governor feels the advent of private virtual currencies has made the introduction of CBDC necessary.

“Developing our own CBDC could provide the public with uses that any private VC can provide and to that extent might retain public preference for the Rupee. It could also protect the public from the abnormal level of volatility some of these VCs experience,” he said.

1. CBDC benefits

According to the RBI deputy Governor, the introduction of CBDC will be beneficial in many ways. He said CBDC “has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk.”

“Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits. It would be RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems,” said Sankar.

“CBDCs is likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation. Drawing board considerations and stakeholder consultations are important. Technological challenges have their importance as well. As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is nigh,” he added.

The RBI Deputy Governor also said that CBDCs will have some clear advantages over other digital payments systems. He said “payments using CBDCs are final and thus reduce settlement risk in the financial system. Imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over – the need for interbank settlement disappears. CBDCs would also potentially enable a more real-time and cost-effective globalization of payment systems.”

2. Impact on bank deposits

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.

3. Difference between CBDCs and virtual currencies

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.”

4. CBDC to complement fiat currency?

Commenting on RBI’s CBDc plan, Edul Patel, CEO & Co-founder, Mudrex said, “The exponentially growing adoption and support of cryptocurrencies worldwide compelled nations to think of ingenious ways to be a part of this pie. This thought gave rise to the idea of digital currencies. CBDCs are not meant to replace fiat currencies but to complement them. They are, in the true essence, a digital version of fiat currency. RBI Deputy Governor emphasized that these currencies would be less volatile than cryptocurrencies, which should be no mystery at all. The significant contribution of CBDCs would be enabling the government’s vision to shift towards a truly cashless economy.”

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.”

5. CBDC impact on virtual currencies like Bitcoin, Dogecoin, Matic etc.

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.