RBI governor Shaktikanta Das reiterated that the central bank may launch a pilot of its digital currency by December 2021. However, the RBI is yet to finalise whether to launch the currency using distributed ledger technology or a centralised ledger.
DLT is the platform on which cryptocurrencies are based, enabling them to be held and traded without any central authority. The statement by Das indicates that the RBI is on track with its plans for a central bank digital currency. “We are being extremely careful about it because it’s completely a new product, not just for the RBI, but globally,” Das told a TV channel. He said that the RBI is studying various aspects of digital currency, including its security, impact on India’s financial sector as well as how it would affect monetary policy and currency in circulation.
Das said that the monetary policy could change course if there was a sign of durable recovery. He said that while currently there is a gap in capacity utilisation in India and there is slack in the economy, he did not see any sign of stagflation.
During the monetary policy press conference on August 6, RBI deputy governor T Rabi Sankar had said that the central bank would come out with a mode for operations of fiat digital currency by the end of the year.
What is a central bank digital currency?
The RBI defines CBDC as a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.
It also said that the idea is not new. At his keynote address, Sankar said in July that the origins of CBDCs can be attributed to American economist and Nobel laureate James Tobin, who proposed a digital form of payment in 1980s.
What is the need for a CBDC?
Across the globe, the adoption of CBDC has been justified for three main reasons: Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency; Jurisdictions with significant physical cash usage seeking to make issuance more efficient and Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.
Moreover, the RBI says that payments using CBDCs are final and thus reduce settlement risk in the financial system. CBDCs would also potentially enable a more real-time and cost-effective globalization of payment systems, according to the central bank.
Difference between cryptocurrency and CBDC
Virtual private currencies like Bitcoin have gained wide acceptance in the last few years. Sankar said that if these private currencies gain recognition, national currencies with limited convertibility are likely to come under threat.
Virtual currencies like Bitcoin are digitally encrypted, decentralised and not linked to or regulated by any government. A CBDC, on the other hand, will be a digital version of the fiat currency – one backed by the government.
While cryptocurrency operates independently, a fiat currency is issued by a country’s central bank. The latter requires intermediaries to make transfers.
Moreover, the supply of fiat currency is regulated by the central banks, and can be increased of decreased depending on the usages, whereas the supply of cryptocurrency is limited.
Also, a currency marked as a legal tender can be kept in bank accounts; the cryptocurrencies need to be stored in digital wallets.
CBDCs, depending on the extent of its use, can cause a reduction in the transaction demand for bank deposits and reliance on cash.
Why we need CBDCs in India?
According to RBI, India’s high currency to GDP ratio calls for a switch to CBDCs. If large cash transactions can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced.
It also said that freely convertible currencies like the US dollar may not be affected as most of the private virtual currencies in vogue are denominated in US dollar. The RBI said that virtual currencies might encourage the use of US dollar. So, a digital currency developed by India could help retain public preference for the Rupee.