According to deputy governor T. Rabi Sankar, the Reserve Bank of India (RBI) is now working on a phased rollout approach for a central bank digital currency (CBDC) and analyzing use cases to ensure minimal or no interruption.
Some key issues, according to Sankar, include whether CBDCs should be used only in retail payments or also in wholesale payments; whether it should be a distributed or centralized ledger; whether it should be issued directly by the RBI or through banks; and the level of anonymity such a currency would provide.
Implementing pilots in the wholesale and retail segments may be a possibility shortly, Sankar said during a Vidhi Centre for Legal Policy webinar.
CBDC is digital or virtual money, he explained, but it is not comparable to the private virtual currencies that have sprung up in recent years. Sankar stated that private virtual currencies conflict with the historical concept of money, echoing the RBI’s reservations about cryptocurrencies.
“They are not commodities or claims on commodities because they have no fundamental value; some assertions that they are analogous to gold certainly seem opportunistic,” he said, adding that a CBDC is similar to a central bank’s currency but takes a different form than paper.
A central bank digital currency is a sovereign currency in electronic form that appears on a central bank’s balance sheet as a liability (currency in circulation). According to a BIS poll from 2021, 86 percent of central banks were actively researching the possibilities for CBDCs, 60 percent were experimenting with the technology, and 14 percent were conducting trial projects.
The reason for this spike in interest, according to Sankar, is that many central banks want to popularize a more acceptable electronic form of currency, while certain jurisdictions that use a lot of physical cash want to make issues more efficient. Other central banks are attempting to address the public’s demand for digital currencies, as evidenced by the growing use of private virtual currencies.
Another advantage of CBDCs is India’s high currency to gross domestic product ratio. The cost of printing, transporting, storing, and distributing currency can be decreased to the extent that enormous amounts of cash can be replaced by CBDCs, he stated.
CBDCs may potentially reduce the requirement for bank deposits by lowering transaction demand. Because CBDC transactions eliminate settlement risks, they lower transaction liquidity requirements, and by providing a truly risk-free alternative to bank deposits, they may drive a shift away from deposits, reducing the need for government guarantees on deposits.
If banks, on the other hand, if banks lose deposits over time, their ability for credit creation gets constrained.
