“Money is a good soldier, and will on." William Shakespeare wrote this line in ‘The Merry Wives of Windsor’, in an unfortunate context in the plot. However, this phrase has come to mean that money should be made to make for you. However, it could also mean that money soldiers on and itself evolves with the shape-shifting economy, and society. The form of money evolving from cowrie shells to central bank-issued digital currency is perhaps best emblematic of this.
The Reserve Bank of India (RBI) has just joined hundreds of central banks around the world at varying stages of research, development, or launch of digital currency (two fully issued) by issuing a concept note on Central Bank Digital Currency (CBDC) or eRupee, indicating the next steps as building a prototype followed by a pilot.
The RBI’s conception of the CBDC is progressive, and underpinned by trust, as public good — it states that digital currency should embody all the features that physical currency represents including anonymity (that currency transactions can be carried out without maintaining evidence of transacting parties), universality (that currency can be used for any transaction), finality (that payment of currency unconditionally settles the transaction), and should have the attributes and advantages of physical sovereign currency, i.e trust, safety, liquidity, settlement finality, and integrity.
This conception, contextualised for the Indian financial system, informs the RBI’s design choices and motivations for its CBDC. While there is much to laud, particularly the commitment to anonymity, privacy, and data governance (finally recommending an “intermediate degree of privacy”, which is perhaps to be preferred over designs and pilots currently in operation with the risk of “social credit” and impeding personal liberty) as well as focus on private sector innovation, there are some missed opportunities — crucially cross-border remittance, and the potential for leadership in international co-operation in this regard, more so in light of India’s upcoming G-20 presidency.
The RBI’s design choices are driven by the Bank of International Settlement (BIS – the central bank for central banks, and standard setter for financial regulation)’s foundational principles and core features for CBDCs — in particular “do no harm” to monetary and financial stability. The concept note, therefore, consistently states that the design of the CBDC seeks to avoid financial disintermediation, and keep extant banks and financial institutions at the centre of its design.
For instance, the choice for an ‘indirect’ issuance model which deploys banks, which whom the CBDC will be held as a ‘token’ to undertake customer facing activities, including KYC/AML checks, accounting, and critically payment settlement. The RBI has chosen this over the ‘hybrid’ model, which also uses banks as intermediaries, but the central bank maintains a central ledger of all transactions.
The concept note acknowledges that the indirect model does not provide for payment finality — on this account it could replicate the current risks of the interbank payment and settlement systems, including insolvency, and operational risks. It does not address how these risks will be addressed in its chosen model, or why is chosen over the ‘layered model’ which, the Bank of England (BoE) considered in their March 2020 paper on CBDC opportunities, challenges, and design, or indeed its own hybrid model.
Given India’s fairly robust digital payment infrastructure and public goods, including the unified payment interface (UPI) as well significant improvements to IMPS, it would be been useful to flesh out in some detail how this model would represent a more effective and faster payment mode, avoiding extant risks.
Similarly, the RBI concept note chooses a non-remunerated CBDC, to avoid disruption to and crowding out of bank deposits. But in doing so does the RBI miss a chance for creative disruption? Could interest bearing CBDCs have led to better monetary policy transmission (which has significantly improved in India in recent years, but has always been a challenge)? Could this model have nudged banks to innovate and improve service quality levels to retain customers? Could this have led to customers to place longer term deposits with banks at higher rates of interest, mitigating asset-liability mismatches currently faced? Would limits on ‘conversion’ between the CBDC and physical currency and/or bank deposits dilute the CBDC, diminishing attributes that are intended to equalise it with physical currency? While the RBI acknowledges the trade-off between better monetary policy transmission and bank deposit disintermediation, a fuller discussion on these and related questions, and rationalisation of its design choices would have been valuable.
In the domestic context, the RBI’s primary motivation for CBDC appears to be to continue to maintain monetary sovereignty and mitigate against risk of private cryptocurrency. This could have perhaps been achieved by undertaking design choices and tweaks to make the CBDC a significantly safer, and seamless alternative, particularly given recent insolvencies of cryptocurrency issuers. Some design improvements may have incentivised users to choose the CBDC over private cryptocurrencies in any event.
In the cross-border context, perhaps, lie the digital rupee’s greatest potential, and perhaps the missed opportunities of the concept note. The World Bank figures consistently show that India is the largest recipient of international remittances, and high transaction costs and last mile delivery challenges impact the retail remitters (immigrant workers).
A 2021 joint report by the BIS, the IMF, and the World Bank submitted to the G20 notes that the central banks have a unique opportunity to design interoperable remittance systems from scratch through the CBDCs, the safest settlement asset possible (as they represent claims against the central bank, or sovereign). Co-ordination between the central banks in designing interoperable remittance systems is more likely than between competing private players, evidenced by several cross-country CBDC projects in operation today — the Project Dunbar converges the Reserve Bank of Australia, the Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank with the BIS Innovation Hub to test the use of the CBDCs for international settlements. Project Bridge is a co-operative pilot for wholesale CBDC involving different currencies involving the central banks of China, Hong Kong, the United Arab Emirates, and Thailand collaborating on the Multiple Central Bank Digital Currency (mCBDC) Bridge Project also under the aegis of the BIS Innovation Hub.
While the RBI concept note name checks some of these, it stops short propose a pilot or project. India assumes the G-20 presidency in December, and this could be the moment to take leadership on this issue of global significance, including investigating means to mitigate against currency substitution, and vulnerability to financial shocks. International co-operation on cross-border CBDC interoperability would also require harmonisation on the treatment of data and privacy, tax and payments laws, and capital flow management measures. The Government of India and the RBI has credibility on some of these issues to craft solutions on these tricky issues, and one hopes the coming months and years will do so.
(The author would like to thank Ganesh Gopalkrishnan for useful inputs.)
Richa Roy is a Partner in the public policy, finance, insolvency practice of Cyril Amarchand Mangaldas, and a UK FDCO Chevening Gurukul Fellow. Views are personal, and do not represent the stand of any organisation or this publication.
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