Although CBDCs have been discussed for the last few years, a completely operational CBDC has yet to be implemented anywhere.
However, in the past few months, countries like the Netherlands, Sweden and China have already begun piloting CBDC projects using distributed ledger technology.
Banking stakeholders have been raised concerns over the potential drop in deposits, disruption in the debt market, reduction in credit creation and impact on lending rates due to the retail CBDC, two people aware of the development said.
RBI is looking to launch a specific purpose CBDC in the wholesale and retail segments. The government, through Niti Aayog, is reaching out to various stakeholders, including banks, they said.
“Many bankers have raised concerns over the retail CBDC,” a person close to the development told ET. “They fear that if the central bank adopts the function of storing and distributing the digital currency, removing the banks as an intermediary between Indian citizens and the RBI, it could have a long-lasting impact. The resistance is only for the retail CBDC and not the wholesale bit, ” he said.
Currently, the RBI is the only authority that prints the Indian rupee.
Banks fear that in the case of a digital currency that’s printed (in the digital form), stored and distributed by the RBI, their existing models could be disrupted.
“The government could look at wholesale CBDC initially. Regarding the retail CBDC, there are ways some of the concerns can be addressed, ” another person aware of the development said. He said that one of the solutions could be a closed retail CBDC.
“In the initial stage, the central bank could introduce something like a pre-funded wallet for banks. These would have digital currencies that banks could use for specific purposes,” the person said adding that currently, these are merely proposals and the government would take a final call on this front. On the wholesale front, the CBDC could see a smoother rollout.
The government could roll out a blockchain-based CBDC that could be used by banks to settle their accounts at the end of the day in nodal accounts, one of the persons said. The netting off currently happens in digital form, but CBDC would be based on a separate tech, the person quoted above said.
T Rabi Shankar, deputy governor, RBI, recently said most of the work has been done on the wholesale account-based route, while some more time is needed on the retail-based digital currency. In July, Shankar acknowledged that retail CBDC could pose some risks.
“If banks begin to lose deposits over time, their ability to create credit is constrained. Since central banks cannot provide credit to the private sector, the impact on the role of bank credit needs to be well understood. Plus, as banks lose significant volumes of low-cost transaction deposits, their interest margin might come under stress, leading to an increase in the cost of credit. Thus, potential costs of disintermediation mean it is important to design and implement CBDC in a way that makes the demand for CBDC, vis-à-vis bank deposits, manageable, ” Shankar said.
This coincides with the government’s plan to regulate cryptocurrencies through a framework in India.
The government was initially looking to introduce a regulation for crypto assets in the winter session, but that now seems to have been postponed.
The RBI has raised concerns over legalising cryptocurrencies such as Bitcoin and Ethereum in India. Governments around the world have struggled with digital currencies due to concerns about tax evasion, money laundering and possible manipulation of exchange rates and money supply.
Several finance ministry officials, the RBI, tax departments and investigating agencies, including the Financial Intelligence Unit, have also raised concerns about how, in their current form, cryptocurrencies are a “systemic risk” not just to security but even to the Indian economy, ET reported on December 11.
The government is now considering whether there is a need for wider consultation and seeking comments from the public as well as whether the CBDC to be introduced by the RBI needs to be a part of the cryptocurrency bill or should be dealt with under the RBI Act, ET reported on December 15.
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