CBDC launch requires nuanced and calibrated approach, says RBI Deputy Governor

On Thursday, Reserve Bank of India Deputy Governor T Rabi Sankar said a nuanced and calibrated approach was essential for the launch of India’s first digital currency as it would have various implications for economics and monetary policy.

RBI plans to release a central bank-backed digital currency using blockchain technology in 2022-23.

“Given the large number of uncertainties about what model works, what design works well in terms of impact on the banking system, on monetary policy data privacy, I think almost all central banks and we don’t make no exception will probably go in for a very careful and calibrated nuanced way,” he said at an event hosted by ICRIER.

Essential learning does not come from global experience but essentially comes from your own experience, he said.

Observing that one of the tenets of introducing any technology, particularly for a central bank, is that it should “do no harm”, he said, “I think central banks would proceed in a way very calibrated and graduated, assessing the impact all the way down the line, and then making those connections to what’s most in demand.” Regarding India, he pointed out that RBI considers Central Bank Digital Currency (CBDC) as the digital form of paper money and without any distinction.

Pointing out that the CBDC would have cost and distribution efficiency, he said, the other motivation for the introduction is the efficiency of the regulation.

This will significantly reduce the time needed for cross-border transactions and make transactions real-time, he said.

On the implications of CBDCs, he said, “While those motivations exist, one has to realize that the global experience is virtually non-existent right now on some things like CBDCs that could affect the system. banking”. CBDCs could affect the transactional demand for deposits in the banking system, he said.

“To the extent that this occurs, deposit creation would be negatively affected and to that extent the ability to create credit by the banking system also declines…to the extent that low cost transactional deposits move away from the banking system, the average cost of deposits could increase, which would generally lead to a slight upward pressure on the cost of funds in the system itself,” he said.

The other implication would be for monetary policy, he said, adding that surveys by the BIS and others seem to indicate that most central banks believe this will have an impact on monetary policy and transmission. .

As for the stablecoin, he said, it could become a much bigger threat to dollarization than a cryptocurrency.

Stablecoin is a kind of asset-backed cryptocurrency.

Cryptocurrencies are so volatile that they cannot be used for small value transactions, he said, citing the example of Tesla where it announced that cryptocurrencies could be used to buy its cars. Later, the company withdrew its decision given the volatility of cryptocurrencies.

Additionally, Shankar said that RBI and the Monetary Authority of Singapore (MAS) will soon link their respective rapid payment systems.

As part of this initiative, India’s payment system, the Unified Payments Interface (UPI), will be linked to Singapore’s PayNow.

The UPI-PayNow link will allow users of each of the two fast payment systems to make instant, low-cost funds transfers on a reciprocal basis without needing to log into the other payment system.

Speaking at the event, Chief Economic Advisor V Anantha Nageswaran said that even the launch of the CBDC will not remove the need to regulate cryptocurrency as it will continue to exist.

Finance Minister Nirmala Sitharaman, in her budget speech on February 1, had announced that the Digital Rupee or CBDC would be issued by the RBI in the coming financial year.

She had also announced that the government would levy a 30% tax on gains made from any other private digital asset from April 1.

Cryptocurrency is an unregulated digital currency, which is not legal tender and is subject to market risk. The information provided in the article is not intended to be and does not constitute financial advice, business advice or any other advice or recommendation of any kind offered or endorsed by NDTV. NDTV shall not be liable for any loss resulting from any investment based on any perceived recommendation, forecast or any other information contained in the article.


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