Reserve Bank of India’s (RBI) decisive move to initially discount the growing promises and popularity of crypto currency in India is quite praiseworthy. In a highly uncertain, volatile and non-transparent global financial regime, adoption of cryptos as a currency runs the risk of putting Indian economy into jeopardy. What instead worth considering was a controlled, transparent and reliable digital currency such as Central Bank Digital Currency (CBDC) to take care of the financial activities of Indian economy vis-à-vis global economy. This is what exactly RBI ushered in when it launched its pilot project on CBDC on November 1, 2022. It virtually took couple of years and some months for the central bank to calibrate their moves in a systematic controlled manner to launch CBDC as it was fully aware of the risks and danger attached to such digital currency. Currently, CBDC is recognized as e-rupee in India. Few nationalized and private banks such as SBI, HDFC, Union Bank of India, YES Bank etc. have been assigned the role of lenders to carry out such activities. Initial stage of such transactions will be in the forms of B to C (Business to Consumers) and C to C. Many other economies like Sweden, Russia, Nigeria and China have also launched such e-currencies.

A Central Bank Digital Currency (CBDC) or Digital Rupee is a digital form of currency notes issued by a central bank. It is a legal tender and treated same as a fiat currency. It can be used as a medium of exchange on one to one with the fiat currency, but exists in a different form. Being a digital currency or e-rupee, it provides contactless transactions and prevents carrying the burden of holding fiat currency in your wallet.

At a time when the global economy is moving towards becoming virtual, role of CBDC will be key to medium of international transaction. RBI’s launching of e-currency is timely, innovative and predictable. Advantages it offers are significant.

Advantages-CBDC

Firstly, it is a sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet. This provides adequate cushion to the central bank to monitor its usage in a transparent manner.

Secondly, the underlying technology, form and use of a CBDC can be moulded for specific requirements. CBDCs should be exchangeable at par with cash. In addition, CBDCs have some clear advantages over other digital payments systems – payments using CBDCs are final and thus reduce settlement risk in the financial system. Imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over – the need for interbank settlement disappears.

Thirdly, CBDCs would ensure potentially a more real-time and cost-effective globalization of payment systems. That’s because transaction gets executed instantaneously. It is therefore possible for an Indian exporter to receive from its American importer on a real time basis in digital dollars, without the help of an intermediary. Besides, time zone difference would no longer matter in currency settlements.

Fourthly, India’s cash to GDP ratio is still very high. Some usage of these high cash transactions may not be necessarily getting reported before the government. This is otherwise becoming part of the black money market. To control or stop these corrupt practices, CBDC might just come handy as this entails digital transactions. In addition, such a move can reduce the excessive use of cash thus cutting down the costs of printing, transporting, storing and distributing across the country.

Fifthly, with the advent of virtual currency (VC), such as Bitcoin, Ethereum, etc. reliability and transparency of such digital assets have come under scanner. Against such high volatility and opaqueness thrown by VCs, CBDC has gained significant momentum and growing acceptance. CBDCs are therefore fast emerging as a secure and stable form of digital money. To reiterate gravity and veracity of such issue, Christine Lagarde, President, ECB (European Central Bank) highlighted in BIS Report “ …central banks have a duty to safeguard people's trust in our money. Central banks must complement their domestic efforts with close cooperation to guide the exploration of central bank digital currencies to identify reliable principles and encourage innovation.”^[1]

Usefulness of CBDC is substantial and desirable. However, it’s also significant to analyze and understand why RBI in the first place didn’t encourage the crypto revolution taking place in world economy such as Bitcoin, Ethereum, etc. Here is a perspective to identify the demerits attached to crypto as the world economy is still at a nascent stage as far as crypto transactions are concerned.

Cryptos-Not Yet Secure

Cryptos before the advent of CBDCs took the world economy by storm. Most economies thought it to be one-stop solution as it has the potentiality to make your global trade transaction system transparent, reliable, corruption-free and monitored. By the end of 2021 crypto currency market world over had crossed the $3 trillion mark.^[2] The worldwide adoption of crypto currency has skyrocketed by 880 per cent over the past few years.

This development has ignited the craze around digital currencies, which economies thought a lucrative investment tool. However, with promising returns, cryptocurrencies also generated their fair share of concerns. The asset is seen with apprehension as its volatility is non-negotiable, which often discourages investors from putting their money on it.

Similar feelings were also noticed in India. Investors and consumers remained wary about its functioning in the economy. Without governmental full proof regulation and provision for legality, such enthusiasm towards crypto didn’t last long^[3] in any economy. Cryptos’ acceptance remained a question mark as far as public at large is concerned. To be as part of medium of exchange or part of store value or as a unit account, could not be established; essentially derecognizing the three functions of money. What it basically says is by the time you have consumed a bottle of beer in a restaurant, paying in cryptos can change prices of beer severely as it immensely subjected to high volatility. That would in turn make your store value unreliable.

So long this game of cryptos remains confined to a small coterie of investors, it doesn’t really matter. This is a digital asset which has no intrinsic value like gold or even like the hard cash; all it has is the trust of the people who are closely associated with it or trading in it. Hence, its multiplication entirely hinges on a belief. This reliance may not last long among partners or traders as it is too personal in nature and doesn’t have any strong legal backing. Even if such games are played at a minimal scale they could have a spiral effect in the financial system, because a large amount of wealth in terms of debt funds might have gone into such making. Such calamity can wipe out substantial part of the global wealth leading to likeable global financial collapse. So, the downsides of such cryptocurrencies are a matter of concern which central bank must pay enough attention to.

Disadvantages of Cryptos

First, crypto promises to disturb the sovereignty of the central bank. Because with introduction of crypto, other governmental departments such as IT and telecom ministry will be involved for smooth functioning. This may create initial hazards in terms of coordination and implementation.

Second, monetary policy of RBI which plays a critical and responsible role in terms of providing direction towards major macro variable’s stability will be significantly challenged as it won’t be able to monitor such digital money supply. Therefore, the RBI may find it difficult to predict inflation. Major reform-flexible inflation targeting adopted in 2016 could be at stake.

Third, access to digital currency transactions is also expensive because everyone needs to have access to computer, tech gadgets and internet connectivity. Many NRIs or Indian diaspora living abroad in Gulf, Australia, Canada and USA still need to pay hefty fee for remitting their money to their homeland once adoption of digital currency is in effect. Such costly affair may restrict India receiving huge amount of remittance from abroad, which are otherwise put into effective use back home.

Fourth, such digital currency asset could weigh heavily on the business of commercial banks. Commercial banks have been acting in financial intermediation for India’s economic growth quite for some time. Nationalization of banks in 1969 gave much boost to such economic growth as it could capture savings of the customers which were given out as loan credits at reasonable interest rate to the needy borrowers. Commercial banks could effectively act as a catalyst. With cryptos, base of such commercial banks could be at stake. This might lead to substantial rise in unemployment and curtailment of supporting financial services. Erosion of base deposits will further result in credit interest rate to go up. Especially at a time when economy is trying to recover to its pre pandemic level such a move will be a drag on the economic growth. This is because easy credit and bank loans may not be easily accessible for new start-up, MSME and entrepreneurs.

Fifth, uncertainty regarding financial market is quite common now. Many privately run banks and PSUs have in the past suffered from huge number of fraudulent transactions as a result NPAs have been created. This could happen when we are dealing with cash and fiat currency. When we move to digital one without having proper regulation, situation could get even worse. Such fear is currently lurking in the minds of investors.

Finally digital transaction with cryptos will lead to compromising with your privacy and security. With the transaction of cash in a retail store, you may not leave any trail whereas with crypto you will. This could make common ordinary citizens feel uncomfortable while transacting anywhere; though such a medium aims to stop any illegal activity.

Under such innovation and novelty what is desirable is to create a secure, legal, transparent and predictable digital regime by which CBDC is slowly and progressively allowed to make transactions possible domestically and globally. In a developing economy like India where access to internet and digital literacy are still a challenge, coexistence of cash and crypto currently will be a realistic option.

Endnotes :

^[1]Press release: Central banks and BIS publish first central bank digital currency (CBDC) report laying out key requirements accessed on December 15, 2022
^[2]https://www.analyticsinsight.net/ accessed on December 15, 2022
^[3] Launching of CBDC by RBI on November 1,2022

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