A digital rupee will be like banknotes, but minus ATMs. Users will be able to transfer purchasing power from their deposit accounts to their smartphone wallets in the form of online tokens, which will be a direct responsibility of the Reserve Bank of India, just like cash.
Individuals’ access to central bank IOUs may not be a big problem in countries with well-capitalized financial systems. But this is a major advantage in India. As researcher Bhargavi Zaveri observes on the IndiaCorpLaw blog, depositors at 21 Indian lenders have been prevented from withdrawing their funds due to banking difficulties over the past few years. “A CBDC, which is a liability of the RBI, will mitigate the risk of losses Indian depositors face when dealing with commercial banks,” she says.
Consumers may find the digital rupee a safer alternative to bank deposits, which underpins 76 trillion rupees ($1 trillion) in real-time annual payments through apps such as Walmart Inc.’s PhonePe, Google Pay from Alphabet Inc. and the Paytm.
But there is also the risk. If e-money becomes popular and the RBI imposes no limits on the amount that can be stored in mobile wallets, weaker banks may struggle to keep sticky, low-cost deposits. And even if they lose that cushion, lenders may be reluctant to shed their loan assets and sacrifice profits. Their less liquid balance sheets could make them vulnerable to bank runs.
All economies are aware of this threat to financial stability. Yet advanced countries are also worried about the decline in the use of banknotes, especially after the pandemic. As more and more purchases are made online, the basis of trust in demand deposits – which they convert to cash at face value – could shrink to a theoretical construct. A digital currency as a public service could keep the notion of convertibility rooted in everyday reality.
In India, however, there is no such urgency as the money is far from dying. Banknotes make up around 15% of the money supply, compared to 1% in Sweden. Still, the Riksbank is in no rush to adopt CBDCs. After five years of evaluating different architectures and pilot projects, the Swedish monetary authority has yet to make a final decision on whether or not to issue an e-krona.
The US Federal Reserve is seeking public input on whether to offer a formal tender to compete with private stablecoins that rely on the dollar as the world’s most popular unit of account. The digital euro is in a 24-month investigation phase. If all goes well, the European Central Bank could offer it by 2025. Japan could postpone a call to 2026. After judging the risks and benefits, Singapore has ditched CBDCs for the time being.
India’s rushed deadline appears to be at least partly a response to the growing popularity of cryptocurrencies, though it’s hard to see how an unpaid means of payment can wean the public off the allure of becoming get-rich-quick from a speculative asset class.
The other reason to rush may be the desire to leave China, which is presenting the digital yuan at the Winter Olympics in Beijing. By early November, some 140 million people had registered for e-CNY. But even in the People’s Republic, there is no national rollout date, and Alipay and WeChat Pay retain their stranglehold on electronic payments. Furthermore, Beijing’s intention to promote a dollar rival in cross-border trade and finance – which likely worries New Delhi – will only become clear after the appearance of the digital yuan in Hong Kong, perhaps via the Wealth connection plan for the so-called Greater Bay Area.
Any role for a digital rupee in India’s fast-growing online economy is unclear. Unlike perfectly anonymous cash, most CBDCs will be designed in such a way that central banks have the power to trace spending to check for money laundering. However, transactions made with them may not be visible to payment applications. The fintech industry could lose access to some of the data it is currently mining with artificial intelligence to provide cheap loans to those who do not have collateral or business and tax records, such as family stores.
There will also be gains, although they will not be immediate. Once international corridors are in place to exchange one CBDC to another, it will no longer be necessary to have an expensive network of correspondent banks to settle cross-border payments. For Indians working abroad, sending money home will become easier and cheaper, resulting in substantial savings for the world’s largest recipient of outbound remittances. However, some of these benefits are possible even without a digital rupee, through a global network of bank-based online payment systems. One such proposal is the Bank for International Settlements’ Nexus project.
A digital rupee might just be a bargain. On the one hand, it may not be a bad idea for the monetary authority to use technology to warn bank management that they need to stop taking depositors for granted. Yet that lesson is probably best administered after lenders put pandemic-related stress on their balance sheets behind them.
Also, the RBI needs to do its homework. Technology, blockchain or otherwise, will have to balance the often conflicting goals of speed, scalability, auditability, security, and privacy, which the Fed is trying to do through its Project Hamilton initiative. Given India’s still vast digital divide, a protocol for offline use needs to be developed. Rushing into implementation of what should ideally be a multi-year project can carry unnecessary risk.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
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