Opinion Why the RBI must tread lightly in its effort to launch digital currency

Across the world, digital currencies are increasingly gaining traction. As many as 105 countries are currently exploring the contours of central bank digital currencies (CBDCs). Ten countries have already launched a CBDC, while another 17 are in the pilot stage. In the Union budget, Finance Minister Nirmala Sitharaman had announced that the RBI would issue a digital currency this year. A few days ago, the RBI released a concept note detailing the aims and design options and also the possible benefits and risks that are likely to stem from issuing a CBDC in India. The rationale for issuing a digital currency ranges from accelerating the pace of financial inclusion and digitisation in the economy, enhancing the efficiency of the payment systems, lowering the costs associated with physical cash management, and ensuring financial stability given the proliferation of crypto currencies. However, the RBI will have to make several design choices to determine the form of the digital currency.

The first consideration centres on the technological backbone — whether the underlying infrastructure of the CBDC will be a centrally controlled database or based on a decentralised ledger technology like Bitcoin. Second, the central bank will have to decide whether it will opt for a wholesale digital currency whose usage is restricted only to financial institutions or a retail digital currency which allows for its widespread usage. Third, will the CBDC be issued and managed solely by the central bank or will its management be left to intermediaries. There are other design considerations, such as will the CBDC be token or account based, will it be interest bearing or not, and the degree of anonymity that it offers. It would appear that the RBI seems to be in favour of an indirect model, similar to the current currency management system, with a non-interest bearing, token-based CBDC.

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India already has a robust payments ecosystem which provides for real-time transactions. To what extent the benefits from issuing a CBDC will materialise is debatable. One particular area where a CBDC can provide significant gains is remittances. It is possible that CBDCs will lower the costs and friction associated with international remittances. Considering the wide-ranging ramifications of introducing a CBDC, as the RBI begins to firm up its views on the form and functionality of the CBDC — it has stated that it will launch pilots to examine the specific use cases of the CDBC — it must tread carefully.