Deepak Talwar, an esteemed lobbyist in the Indian corporate space, explores the implication of the RBI’s latest announcement regarding CBDC.
In July 2021, the Reserve Bank of India (RBI)’s Deputy Governor T Rabi Sankar indicated towards RBI’s plans for “phased implementation of Central Bank Digital Currency” – CBDC. This announcement comes on the trails of the recent boost of cryptocurrency investors. Many nations are at different stages of their experiment with CBDCs and India is joining them with a careful approach.
However, the system, the technology and the infrastructure are more complex than just being about a currency that is online. According to Deepak Talwar, “the key reason for launching CBDC is the vulnerability that comes with private digital currency”.
Between April-May this year, almost every cryptocurrency, like Bitcoin, Ethereum, Binance Coin, ADA, experienced hard crash, from which they haven’t yet recovered. Due to their limited penetration in national economies, the impact of the crash was constrained.
RBI is moving to fulfil the demand of the people while simultaneously safeguarding the underlying structure of currency and economy. “Ministry of Finance undertook the exploration of CBDCs in 2017 when it constituted a High-Level Ministerial Committee to study the regulatory and policy framework. Its foremost recommendation was introduction of CBDCs as a digital counterpart to the fiat currency in India”.
“In 2021, BIS published a survey of central banks in which it was reported that 86% of them were involved in research stage of CBDC; 60% were imploring the technology required for it; and 14% had already deployed pilot projects for their central digital currencies”, informs Deepak Talwar.
According to RBI, private digital currencies are volatile and devoid of credit insurer unlike public currency, which is “issued and insured by the sovereign”. Moreover, it has certain edge of digital mode of payments, such as UPI, NEFT, RTGS, which despite their ease and accessibility leave scope for improvement.
Explaining the core difference between CBDCs and digital payment methods, Deepak Talwar says, “With CBDC, settlement risk within the financial system will be reduced, as the transfer of balance will be equivalent to cash and not as bank-to-bank transactions”. This will, he further elaborates, “open the possibility of an Indian paying someone abroad in real time in Digital Dollars, without any intermediary like the US Federal Reserve System or Forex changes”.
Over the last few years, many countries have incorporated CBDCs, either as pilot or in totality. The Bahamas launched the first CBDC in the world in October 2020, called the Sand Dollar. “The Sand Dollar being the digital version of the Bahamian dollar is a glimpse of what RBI is working towards.”
Aside from the benefits of CBDC, there are challenges which RBI and other central banks are trying to resolve. In Deepak Talwar’s view, “technological and digital penetration will play a huge role in how successfully this plays out. There is an imperative need to focus on developing better and robust telecommunications network, especially in non-metropolitan parts of India.”
Talking about the impact of CBDC on the banking system, he cautions, “Since CBDCs are distinct from bank deposits, customers can easily withdraw their balance in CBDC in event of a crisis with the bank. Interestingly, the awareness of this might also influence people in being assured about the safety of their money, preventing large flight of capital from an already distressed bank.”
Advocating both interest and vigilance, Deepak Talwar encapsulates the story around CBDC and states, “A full-fledged implementation of CBDC by RBI will entail comprehensive overhaul of not only the banking system, but also the legal framework around currency and economy provisions, as well as an intensive push towards the evolution of IT and Telecom infrastructure in India.”
