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Why RBI is being cautious in rolling out the Central Bank Digital Currency

The government first announced its plans for a CBDC in January 2021, but the progress has been sluggish.

The Reserve Bank of India (RBI) will proceed very gradually in rolling out the Central Bank Digital Currency (CBDC) because there are a number of issues involved, Deputy Governor Michael Patra said on February 23 at the Asia Economic Dialogue 2022.

“We will cross the river by feeling the pebbles.” – Michael Patra

Earlier this month, Finance Minister Nirmala Sitharaman announced that a Digital Rupee using blockchain technology will be issued by the RBI starting 2022-23. Patra on Wednesday said that the central bank is on track with this timeline, but it is still taking measured steps and making calibrated moves. The government has made it clear in multiple instances that the CBDC will be the only cryptocurrency that will be considered legal tender in India.

Why RBI is cautious

RBI Governor Shaktikanta Das has previously said that the central bank needs to safeguard CBDCs from risks of digital frauds and cybersecurity before rolling them. Patra yesterday laid out some additional concerns that are slowing down the RBI:

  1. Privacy issues: CBDCs involve privacy risks, Patra said. But it is not clear what risks Patra was referring to. Cryptocurrencies like Bitcoin and Ethereum use open blockchain ledgers in which transactions are visible to everyone and it might be possible to match a wallet address to a particular individual by combining multiple transactions or observing spend patterns. However, transactions done with CDBC are unlikely to be in an open ledger, so the risk of identification is not the same.
  2. Energy use: “There is also an issue of energy intensity of the whole process if it is on a certain kind of technology,” Patra said, most likely referring to the high-energy consumption incurred while recording transactions on blockchain.
  3. Monetary policy transmission: Monetary policy transmission refers to the process through which policy action of the central bank is transmitted to meet the ultimate objectives of inflation and growth. While Patra did not expand on the concern, last year, Deputy Governor Rabi Sankar, mentioned the following monetary policy concern:

“CBDCs may bring about a change in the behaviour of the holding public. And what the nature of that change would be cannot be gauged a priori given that no central bank has launched CBDC. If there is overwhelming demand for CBDC, and CBDCs are issued largely through the banking system, as is likely, more liquidity may need to be injected to offset the currency leakage from the banking system.”

CBDC in some form already exists for wholesale: Patra

“As you know, in India, we have CBDC in some form at the wholesale for the banks. So the wholesale is actually done and dusted. We don’t need to do much. It’s the retail CBDC, which is the issue,” Patra said.

Retail CBDC is the form that will be used by the larger public, while wholesale CBDC refers to the use of CBDC by banking institutions for the settlement of interbank transfers.

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India actually doesn’t have a blockchain-based CBDC for wholesale payments, but Patra might be referring to the fact that India’s wholesale payment system is digitally advanced enough that it already has many of the benefits of CBDC.

Will engage in a fair debate on crypto regulations: Patra

Although RBI has made its view clear to the government that cryptocurrencies should not be legal tenders, the bank will still engage in a fair debate and will look at all sides, Patra said.

Earlier this month, RBI governor Shaktikanta Das called cryptocurrencies a “huge threat to macroeconomic and financial stability” and likened the frenzy around cryptocurrencies to Tulip mania— a speculative bubble witnessed in the Netherlands in the 17th century. He implied that cryptos do not even carry the value that tulips carried at the height of Tulipmania. Given this strong stance, it’s not sure if RBI will really ever consider crypto as legal tender.

What are the benefits of CBDCs?

In response to a parliamentary question, the government last December highlighted the following benefits of CBDCs:

  1. Reduced dependency on cash
  2. Higher seigniorage due to lower transaction costs (seigniorage is the profit made by a government when issuing currency, calculated as the difference between the face value of coins and production costs)
  3. Reduced settlement risk
  4. More robust, efficient, trusted, regulated, and legal tender-based payments option
  5. Will not have volatility which is normally associated with private cryptocurrencies

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