RBI last week issued a concept note on the central bank digital currency (CBDC) and added that a pilot project will soon be launched for specific use cases. There’s been a notable change in the global environment for digital currencies since the budget. Private cryptocurrencies have been shown to lack characteristics such as stability in value. Effectively, it means they can never be a threat to currency issued by a central bank.
Nonetheless caution is called for. RBI seems, rightly, disinclined to make a hasty transition to CBDC. Plus, the central bank leans towards a design quite similar to the current system with physical bank notes. RBI’s approach aims to complement and not replace the existing system. Therefore, CBDC is defined as an instrument that can be exchanged on a par with physical currency. This is a smart approach as it will avoid any chance of disruption. Public faith in legal tender is the foundation of a monetary system.
A CBDC is the existence of currency in digital form. India’s rapid evolution to an inclusive digital payments system has almost brought us there – it’s an achievement that has evoked global interest. The existence of digital payment mechanisms for all denominations means that Indians already experience the core benefits of CBDC. Consequently, RBI’s caution and open-mindedness when it comes to designing digital rupee make sense. About 10 countries, beginning with the Bahamas in 2020, have launched a CBDC. Among major economies, China and South Korea have launched pilots. RBI’s concept note points out that the potential impact of CBDCs on monetary policy is still unclear. In India, a CBDC will work best if it’s interoperable with the existing payments system.
This means that banks and private payment applications need to be part of the overall design. One of the anticipated benefits of CBDC is real time cross-border payments. It requires central banks getting together to develop an international settlement platform. Down the line, this will have implications on the fate of the US dollar as reserve currency. If major economies adopt digital currencies that are stable and that flow through a global payments system, there’s less need for everyone to accept one national currency as reserve currency. But that’s quite far in the future. For now, RBI’s caution is the best approach.
This piece appeared as an editorial opinion in the print edition of The Times of India.
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