Why central banks oppose crypto but explore own digital currencies

Aseem Gujar & Partha Sinha | TNN
When you make a UPI payment, your bank settles the amount on your behalf at the end of the day. Digital payments like UPI are electronic instructions that authorise intermediaries such as banks to facilitate transactions. Even if they are ‘cashless’ modes of payment, they involve transfer of fiat money (government-issued currency).
Now imagine a UPI-like system where digital currency issued by a central bank is transacted instead of bank balances. The need for interbank settlement disappears and you have the option to pay someone securely, without third-party risks. What if money itself could be ‘digital’?
The RBI has called for a complete ban on crypto as it believes partial restrictions won’t work. But, at the same time, it is considering issuing its own digital currency by leveraging the technology that powers crypto. “A central bank digital currency (CBDC) would also potentially enable more real-time and cost-effective globalisation of payment systems. Time zone difference would no longer matter,” said T Rabi Shankar, RBI deputy governor, in a speech last year.
The RBI defines a CBDC as a legal tender issued by a central bank in a digital form. “It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different,” said Shankar. The RBI is working towards a phased implementation strategy to minimise disruption.
But what is the need for a CBDC in India where cash is popular? According to Shankar, countries with significant cash usage are seeking to make issuance more efficient as CBDCs can reduce the cost of distributing money.
Cryptocurrencies came up in the last decade promising secure, anonymous, and efficient transactions. However, being decentralised — which means no authority can regulate them — privately issued virtual currencies threaten state control over money.
A US Federal Reserve paper released last week, seeking public opinion on the CBDC, noted that CBDCs’ foundation — a combination of cryptographic and distributed-ledger (blockchain) technologies — was created by crypto. But apart from the underlying technology, there are no similarities between crypto and CBDCs, say legal experts. “People are not acquiring crypto to transact, they are investing because they believe the asset would appreciate as the value of fiat currency deteriorates due to excess supply,” said Manvinder Singh, partner, J Sagar Associates. He added that the CBDC is expected to be a mode of payment and not an asset like crypto.
According to a report by the Bank for International Settlements (BIS), about 86% of the world’s central banks are doing research on CBDCs, which would help preserve public ‘trust’ in money and provide electronic convenience.
However, CBDCs could disrupt the status quo of
The RBI’s deputy governor too noted the risk of banks’ credit-creation ability getting constrained. “It is important to design & implement CBDC in a way that makes the demand for CBDC, vis a vis bank deposits, manageable,” he said.
Authorities have the option to allow CBDCs only for wholesale use (like inter-bank transfers) initially to minimise disruption in commercial bank operations. A legal framework would also need to choose either a distributed or centralised ledger, define the level of anonymity and role of banks, and address cybersecurity concerns.
While the advent of crypto has indirectly advanced the development of CBDCs, the concept is not recent. In the 1980s, American economist and Nobel laureate James Tobin had suggested that Federal Reserve Banks in the US could make available a widely accessible “medium with the convenience of deposits and the safety of currency”.
According to the BIS report, 14% of the world’s central banks, led by the Chinese regulator, were deploying CBDC pilot projects. The first government-backed paper currency too was issued in China in the 1120s.
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