The RBI has floated a concept note on Central Bank Digital Currency (CBDC) on 7th October, 2022. The note spells out the responsibility of the central bank to provide the citizens a risk-free CBDC without any risks associated with private cryptos. Can digital fiat be put on par with private tokens? CBDC is not another Bitcoin. Cryptos are tokens. CBDC is a digital currency. CBDC cannot substitute virtual digital assets.
According to the RBI, by design cryptos bypass established and regulated intermediation and control arrangements. Such a system ensures integrity and stability of the monetary and financial ecosystem.
According to industry executives, the concept note takes a conservative and outdated view on cryptos.
Internationally, CBDCs are the outcome of the process to defend the monopoly of the fiat currency. It resists cryptos, rather than allowing it to co-exist. Industry executives feel CBDC nibbles the very proposition of decentralisation that cryptos put forward.
However, crypto companies find CBDC to be consistent with the digital ecosystem India has built so far, and expect the RBI to be more accommodative of private digital assets. Cryptos will never replace fiat.
The concept note takes a nuanced approach, and expects India to emerge as a digital economy. It is a great initiative to launch CBDC.
The RBI is disinclined to make a hasty transition to CBDC. Its design of CBDC leans towards that of the physical currency system. It aims to complement and not replace the existing system. There are many design choices for the CBDC. The concept note spells out the current choices. CBDC will cater to both the retail and wholesale sector. The RBI could select an intermediate model — CBDC will be issued to licensed intermediaries who distribute it further, similar to how cash is distributed. CBDC would be non-interest bearing so as to prevent competition from the interest-bearing cash deposits. The retail CBDC would be token-based and the wholesale, account-based. Finally, CBDC would preserve anonymity, similar to cash.
CBDC, as an instrument, can be exchanged on par with a physical currency.
About 10 countries have launched CBDC. Over 100 countries are said to exploring the possibility of introducing CBDC. Bahamas pioneered it in 2020. China and South Korea are the major economies who have launched pilots.
The concept note of RBI states that the potential impact of CBDCs on monetary policy is still unclear. It will best to have a CBDC in India that is interoperable with the existing payment systems.
CBDC will facilitate real-time cross-border payments. Central banks can jointly develop an international settlement platform. If major currencies which are stable and flow through this system, there is no need to have reserve currency such as dollar. That is looking too far in future.