Inside The RBI’s Digital Currency Dream

Context: CBDCs have suddenly become the flavour of the season. And it could very well be the future of money.

About Central Bank Digital Currencies (CBDCs)

• CBDCs is a legal tender in the digital form issued by the central bank and managed on a digital ledger (a blockchain). 
• CBDCs will be using the same blockchain technology as cryptocurrencies but will be deployed in a way so that central banks can be in control of the money and, thus, the monetary policy.
• Global trend: A survey conducted in 2020 by the Bank for International Settlements (BIS) showed that 
• 86% of global sovereign monetary institutions were actively researching the potential for CBDCs, 
• 60% were experimenting with the technology and 
• 14% were in the process of deploying pilot projects. 
• China already launched digital yuan last year.

Factors behind the rise of interest in CBDCs

• A response to the rise of alternative payment systems: A state intervention is essential to protect the general public in an environment of volatile private virtual currencies such as-
• Cryptocurrencies such as bitcoin.
• Proposed launch of a Facebook-backed digital stablecoin called ‘Diem’: Stablecoin is a digital currency that is linked to an underlying asset, such as the US Dollar or gold.
• Limitations with the existing model: Such as complexities associated with cross-border transactions, high cost of banking due to stringent KYC norms etc.

Potential benefits of CBDCs

• Immediate benefit: Benefits associated with replacement of existing currency notes.
• Fuelling aspirations of de-dollarisation: Viewed as a step to replace and upend the SWIFT system, which gives the US a disproportionate control of the (current) global settlement process.” 
• Domestic priorities – CBDCs have the potential to change the foundation of the banking ecosystem:
  • A CBDC changes the way money is issued, the way it reaches the citizen from the central bank, and the capabilities that the money has, it can be tokenized, code can be embedded into it,”
  • CBDCs, along with cryptocurrencies, could pave way towards India’s vision of a cashless economy.
  • Cost of banking could register a steep fall as the whole KYC mechanism is going to be easier and cheap with digital currencies.
• Strengthening welfare scheme delivery: By easier beneficiary identification, ensuring that the DBT money transferred is used for intended purposes etc.
  • Recently launched e-RUPI, an electronic voucher-based digital payment system, could bridge the gaps.

Challenges associated with CBDCs

• Uncertainties around design choices: The precise nature of its implications will largely depend on the design choices that the Reserve Bank of India makes.
•  RBI will need to think about the degree of anonymity and transacting ability when transacting via CBDC.
• Whether CBDC can be utilized for both retail payments (peer to peer) or will it be limited to wholesale payments (among banks and financial institutions for the settlement of transactions).
• Whether CBDC units will be interest-bearing or not .
• Privacy concerns: There are concerns from industry in shifting towards a full surveillance-like system where RBI can have unprecedented powers.
• This nullifies the principle of decentralization, privacy and inclusion that cryptocurrencies offer.
• Governance and control structures need to be upgraded: To manage the unique risks which will arise with CBDC.
• In terms of the legal framework, RBI will be required to clearly set out the roles and responsibilities of not just RBI but also banks, financial intermediaries and fintech platforms.
•  Several amendments to existing banking norms will be required to enable a digital currency (as opposed to paper currency).