Introduction of a central bank digital currency (CBDC) has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk, a top RBI official said on July 22.
A CBDC is the 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.
"Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option," said deputy governor T Rabi Sankar at his keynote address at a webinar organised by the Vidhi Centre for Legal Policy, New Delhi.
However, there are associated risks, Sankar said, adding these risks need to be carefully evaluated against the potential benefits.
"It would be RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems. CBDCs is likely to be in the arsenal of every central bank going forward," Rabi Sankar said.
Noting that setting up CBDC will require careful calibration and a nuanced approach in implementation, the deputy governor said drawing board considerations and stakeholder consultations are important.
"Technological challenges have their importance as well. As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is nigh," Sankar said.
CBDC is not private virtual currency
Sankar said it is equally important to understand what a CBDC is not.
“CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade,” Sankar said.
Further, private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value, said the RBI deputy governor, adding some claims that they are akin to gold clearly seem opportunistic, the deputy governor said.
“Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. There is no ISSUER. They are not money (certainly not CURRENCY) as the word has come to be understood historically,” Rabi Sankar said.
Rabi Sankar said the advent of private virtual currencies (VCs) may well be another reason why CBDCs might become necessary. “It is not clear what specific need is met by these private VCs that official money cannot meet as efficiently, but that may in itself not come in the way of their adoption. If these VCs gain recognition, national currencies with limited convertibility are likely to come under threat,” Rabi Sankar said.
The deputy governor’s comments are important in the context of ongoing debate on whether India should allow private virtual currencies such as Bitcoins. The Government is working on a Bill to regulate virtual currencies in India.
Sankar said the case for CBDC for emerging economies is thus clear – CBDCs are desirable not just for the benefits they create in payments systems, but also might be necessary to protect the general public in an environment of volatile private VCs.
Also, Sankar outlined certain risks associated with CBDCs saying availability of CBDC would make it easy for depositors to withdraw balances if there is stress on any bank. "Flight of deposits can be much faster compared to cash withdrawal," Sankar said.
"On the other hand, just the availability of CBDCs might reduce panic ‘runs’ since depositors have knowledge that they can withdraw quickly. One consequence could be that banks would be motivated to hold a larger level of liquidity which could result in lower returns for commercial banks," the deputy governor said.
However, notwithstanding the benefits of CBDCs vis-à-vis bank deposits, since CBDCs are currency and therefore do not pay interest, their impact on bank deposits may actually be rather limited, Sankar said. "Depositors that require CBDCs for transactional purposes are likely to sweep day end balances to interest-earning deposit accounts," the deputy governor said.