RBI must opt for alternatives to digital currency
Many transactions can be made compulsory through digital mode and there can be limits on cash payments
The Reserve Bank of India on October 7 released a concept note on Central Bank Digital Currency (CBDC). The purpose behind the issue, as claimed by the RBI, is to create awareness about CBDCs in general and the planned features of the Digital Rupee (e?), in particular. It explains the objectives, choices, benefits, and risks of issuing a CBDC in India. The Note also seeks to explain Reserve Bank’s approach towards introduction of the CBDC, which has been launched on a pilot basis now.
As explained by the RBI the e? will provide an additional option to the currently available forms of money. It is substantially not different from banknotes, but being digital it is likely to be easier, faster and cheaper. It also has all the transactional benefits of other forms of digital money.
The RBI claims that its approach is governed by two basic considerations – to create a digital Rupee that is as close as possible to a paper currency and to manage the process of introducing digital Rupee in a seamless manner.
The concept paper lists out the following as features of CBDC:
- CBDC is sovereign currency issued by Central Banks in alignment with their monetary policy
- It appears as a liability on the central bank’s balance sheet
- Must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
- Freely convertible against commercial bank money and cash
- Fungible legal tender for which holders need not have a bank account
- Expected to lower the cost of issuance of money and transactions.
There can be two types of currencies which are used for settlement of transactions. One is physical currencies and another digital form of currency. As we have now all the bank deposits which can be transacted through digital platforms are part of digital currencies only. So whose custody is not important. How digitally it can be transacted only matters.
Hence the question arises why there should be a digital currency from the RBI now? If the aim is to completely wipe out the physical currency, it is a different matter. Not only is our country, no other country in the world is aiming for any such proposition.
Our bank accounts provide seamless digital transactions by means of debit cards, credit cards, NEFT, RTGS, IMPS, UPI etc. Now in this concept paper RBI broadly defines CBDC as the legal tender issued by a central bank in a digital form. It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender and a safe store of value. Hence, it is almost identical to the digital transactions provided by banks except the sovereignty.
The RBI says that the key motivations for exploring the issuance of CBDC in India among others include reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency, and innovation in payments system, adding efficiency to the settlement system, boosting innovation in cross-border payments space and providing public with uses that any private virtual currencies can provide, without the associated risks. Again, these are already available for digital transactions through bank accounts.
The RBI claims that CBDCs have some clear advantages over other digital payments systems, as it being a sovereign currency, ensures settlement finality and thus reduces settlement risk in the financial system. This may be theoretically and conceptually true. But then this undermines the banking system we have under the same RBI regulation. If any bank fails in any settlement system, then it will speak about RBI’s supervision.
As per the scheme, the CBDC issued will be the liability of the RBI and whoever wants to have this will have to pay to RBI to acquire this CBDC. Hence it is similar to deposits obtained by commercial banks. But the RBI has decided not to pay any interest on this. As it is primarily introduced as a method of payments like cash, it would not bear interest.
Instead of going in for CBDC, the RBI can further improve penetration of digital transactions by making many transactions compulsory through digital mode. There can be limits on cash payments. There can even be restricted use of cheques. This will reduce cost for the economy as well as arrest illegal and unaccounted transactions.
Irrespective of the form of money, in any economy, money performs three primary functions—medium of exchange, a unit of account and a store of value.
(The author is a retired banker)