Central bank digital currency (CBDC) can replace cash-based transactions to some extent in India, Reserve Bank of India Deputy Governor T. Rabi Shankar said in an ICRIER webinar on ‘Getting Central Bank Digital Currency Right for India: Lessons from G20 and the Rest of the World’ on April 7.
Over the last five years, while digital payments have risen at an average annual growth rate of about 50% roughly in India, the supply of currency has also almost nearly doubled, Shankar said. The currency in circulation before demonetisation in 2016 was roughly about Rs 17 trillion and presently it is at about Rs 30 trillion.
Shankar cited a 2018-2019 RBI survey that showed that cash accounts for roughly 50% of all transactions in India and for transactions below Rs 500, the percentage goes up to 70%. Thus, CBDCs have a scope to replace cash to some extent, Shankar said.
The central bank deputy governor further said that 87 countries globally, accounting for 90% of world GDP, are in some way or the other, looking actively at CBDCs. These nations are either researching, publicly discussing, or launching pilots and some have even gone live with such assets.
This was not the case since the beginning, he said. Critics questioned the use of CBDCs saying it cannot serve more unique purposes than a normal digital payments system can. However, with the introduction of stable coins, central banks have started to give the application of these assets serious thought.
“Now with the advent of stable coins, the issue of volatility went out, and then central banks sat up and said there is a clear threat from private currencies and even worse if multiple private currencies were to replace the official or fiat currency, I think that is what led to the flurry of activity across central banks,” Shankar noted.
Immense public participation in the crypto world may also have made governments change their stance around CBDCs to some extent. “Now, it is a question of when rather than if for most of the currencies,” Shankar said referring to the implementation of CBDCs.
Further, ease in cross-border transactions, settlements, cost efficiency, and financial inclusion are some of the other benefits of using CBDCs, Shankar said. However, in order to avail these benefits, all countries must adopt CBDCs, he opined.
Lastly, issues such as CBDCs' impact on monetary policy effectiveness, the transmission of rates, currency leakage, and privacy and data protection are some of the challenges that need to be dealt with while dealing with CBDCs and thus the RBI is cautiously moving ahead with the implementation of the project, Shankar said.