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RBI's digital currency plan: Challenges, risks and benefits

RBI is working on a phased implementation strategy for its own digital currency


Recently, during a webinar, the deputy governor of Reserve Bank of India T. Rabi Shankar remarked that the RBI is currently working on a phased implementation strategy for its own digital currency, Central Bank Digital Currency (CBDC), and will launch it in the wholesale and retail segments soon. The primary idea for the RBI is to protect consumers from the appalling level of volatility seen in some or many of the virtual currencies that have no sovereign backing. Though the phased rollout of digital currency augurs well for India, it will come with its own challenges.

Digital currencies are gaining more and more traction by the day, and there are countries which have launched, or are going to be launching digital currencies, including Ecuador, Tunisia, Senegal, Sweden, Estonia, China, Russia, Japan, Venezuela, and Israel.

Reports say that 81 countries, representing over 90 per cent of Global GDP, are exploring CBDCs. Fourteen counties have tested pilots, in 16 countries such currencies are in the development phase, and 32 countries in the research phase. Fourteen major economies, including China and South Korea, have tested pilots. China is currently leading the race of CBDCs, and has recently released a report which mentioned $ 5.5 billion worth transactions carried out during the digital Yuan pilot run. China has plans to introduce digital Yuan in the winter Olympics next year. The Bank of England is also pushing a pilot programme for bitcoin in the next few weeks.

However, experts with whom THE WEEK spoke have different views on the subject. Some find the concept revolutionary in India, some find it a positive move, while some others warned that the launch of CBDCs may not be a smooth affair and still requires more clarity in India. There are still a lot of misconceptions about the concept of digital currency in the country.

“The CBDC central bank digital currency should not be mistaken with a cryptocurrency or Bitcoin. A CBDC is a central bank issued digital currency which is backed by some kind of assets in the form of either gold, currency reserves, bonds and other assets, recognised by the central banks as a monetary asset. This guarantee from a central bank reduces the CBDC risk, volatility, and ensures a larger acceptance across the globe. On the other hand, a cryptocurrency is issued by a network and backed by a crypto asset which may or may not have the backing of any monetizable asset or physical asset.

Therefore, the risk is higher and there is more price volatility and lesser acceptance as a money instrument globally, unless the trust factor and investor protection factors change,” explained Sudin Baraokar, Global IT and Innovation Advisor.

According to Baraokar, a CBDC can definitely increase the transmission of money from central banks to commercial banks and end customers much faster than the present system. “Specific use cases, like financial inclusion, can also be covered by CBDC that can benefit millions of citizens who need money and are currently unbanked or banked with limited banking services,” he said.

Experts point out that the move to bring out a CBDC could significantly improve monetary policy development in India. The enhanced surveillance and real-time situational monitoring enabled by the central bank digital currencies can go a long way in stimulating these processes. “RBI's move to enable CBDC provides all participants a framework to fully realize the potential of digital currency. The central bank's effort to be at the forefront of digital innovation can help grow an ecosystem similar to UPI that will reduce inefficiencies for the end customer while opening up massive opportunities for entrepreneurs,” remarked Nikhil Kamath the co-founder and chief information officer, True Beacon and Zerodha.

A few experts also feel that CBDC could allow governments to effectively tackle illegal activities, such as payment fraud, giving people a greater sense of security with their money. “Digital fiat currencies create greater barriers to illicit activity, as physical cash can help conceal and transfer funds outside of regulated financial systems. With the growing adoption of CBDCs, payments and transfers will be easier to identify and trace to previous sources, significantly reducing the risk of fraud and money laundering.” observed Raj N., Founder and chairman, Zaggle & Zikzuk.

Analysts point out that there are also risks involved with digital currencies and the central bank will have to carefully analyze the pros and the cons of digital currencies before they are rolled out in India.

“The government and the central bank have to access and analyse every possible scenario to build robust control and framework around the evolving blockchain technology. But one should keep this in mind that these changes cannot be done overnight as consequential amendments would also be needed in the legal framework i.e. in the Currency Act, the Foreign Exchange Management Act (FEMA) and the Information Technology Act,” pointed out Vikas Ahuja, CEO, Crosstower, and member, IAMAI-BACC.

Experts note that digital currencies have all the intrinsic advantages of fiat currency like it is durable, portable, fungible and divisible. Being digital, it will make it easily verifiable, more secure and traceable. Hence, improving upon the existing advantages of paper currency.

“This is also a step by central banks to fight the onslaught of crypto currency by coming up with currencies that offer all the advantages of digital currency and also have the additional benefit of being scarce (inflation resistant) and without an intermediating authority. Only time will tell how far the crypto revolution goes. But time has surely come for countries to take their fiat currencies digital. It might not exactly be crypto but can certainly be based on blockchain technology to give it the gilt edge of being highly safe, secure and traceable,” remarked Mohit Gang, founder and CEO, Moneyfront.

Experts point out that it is still unclear whether India’s CBDC will be account based or token based. Retail CBDCs will strengthen India’s digital payments story by making it resilient and accessible. As programmable money, digital Rupee should be used for utility and transit payments first. CBDCs have to co-exist with existing payment modes such as cash and digital payments.

“In the cross border payments domain, India can take a lead by leveraging digital Rupee especially in countries such as Bhutan, Saudia Arabia and Singapore where NPCI has existing arrangements with respect to digital payments. Retail CBDCs can make cross border payments and settlements real-time. China’s e-CNY ( Digital Currency Electronic Payment) is not blockchain based. The Bank of England does not advocate a blockchain based system for CBDCs. However, the French Central Bank, which used wholesale CBDCs for interbank settlement, has started experiments on public blockchain for settlement of listed and unlisted securities. The effectiveness of CBDCs will depend on aspects such as privacy design and programmability. A general purpose CBDC should have the same anonymity as cash and recognition as legal tender to gain acceptability,” said Sharat Chandra, blockchain expert, IET Future Tech Panel.

Experts state that the central bank digital currencies are a direct liability of the central bank whereas the blockchain based private currencies are not backed by any sovereign nation or financial entity. There are many aspects where the CBDCs score over crypto currencies. As there is less volatility compared to private cryptocurrencies, it helps in the prevention of fraudulent activities, and is a progressive step towards a cashless economy. Besides, it will most certainly make the banking system more efficient.

Experts, however, observe that there are also certain negatives attached to the CBDCs. “The approach of bringing a sovereign digital currency stands in stark contrast to the idea of decentralisation. Central banks would indulge in issuing more digital currencies which could potentially trigger higher inflation. Cryptocurrencies such as Bitcoin provided a hedge to this risk of inflation by putting a cap on the maximum number of tokens. Moreover, cryptocurrencies came into existence intending to eliminate the middleman, thereby establishing a system of trust without the need to depend on any single entity. CBDCs would again rely on the banking system, as these are just the digital version of fiat currency,” Edul Patel, CEO and co-founder, Mudrex, a crypto trading platform.

Some point out that user adoption could also pose a major setback for the smooth roll out of the CBDC in India. “The main challenges would always be user adoption and security. If governments adopt the technology and find a way to regulate digital payment flows, we can expect more competition in the coming years. At the same time the cryptocurrency community is feeling uncomfortable with the emergence of CBDCs mainly due to misconceptions in regards to CBDCs. I believe cryptocurrencies and CBDCs can coexist. Cryptocurrencies will continue to serve different business use cases from art, finance, advertisement to supply chain. CBDCs may pose big risks to Stablecoins, not the whole cryptocurrency market,” pointed out Hitesh Malviya, founder and CEO, itsblockchain.com.

More clarity on the concept in the days to come will be the key for CBDCs and much will depend on how the whole concept will evolve in India which is predominantly a paper currency market. “There is still a lot of ambiguity in the regulatory environment for private virtual currencies (Bitcoin, Ethereum etc) and hopefully this is one step forward to recognise how these currencies can co-exist with a sovereign backed digital currency. There is a huge opportunity for India to take a lead globally via a large-scale rollout and adoption of digital currencies and hopefully this announcement brings a lot more room for debate into how we can move forward,” said Vikram Ahuja, co-founder, Talent500 by ANSR. 


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