Nuanced, calibrated approach essential for introduction of CBDC, says RBI’s Sankar

It will greatly reduce the time required for cross-border transactions and make the transaction real-time

It will greatly reduce the time required for cross-border transactions and make the transaction real-time

Reserve Bank of India deputy governor T. Rabi Sankar said on Thursday that a nuanced and calibrated approach is essential for the introduction of India’s first digital currency, as it would have different implications for the economy and monetary policy.

RBI plans to release a central bank-backed digital currency using blockchain technology in 2022-23.

“Given the large number of uncertainties about which model works, which design works well in terms of impact on the banking system, on data privacy and on monetary policy, I think almost all central banks and we are no exception are likely to go in.” for a very careful and calibrated nuanced way,” he said at an event organized by ICRIER.

The essential learning does not come from global experience, but in fact comes from your own experience, he said.

Noting that one of the principles for introducing technologies, especially for a central bank, is that it should do “no harm,” he said, “I think central banks would do this in a very calibrated, gradual way and assess the impact down the line and then make those connections to what is most in demand.” As for India, he stressed that the RBI looks at Central Bank Digital Currency (CBDC) indiscriminately as the digital form of paper money.

He emphasized that CBDC would have cost and distribution efficiency, he said, the other motivation for introduction is settlement efficiency.

It will significantly reduce the time required for cross-border transactions and make transactions real-time, he said.

On the implications of CBDCs, he said: “While these motivations exist, one has to realize that global experience at this point is virtually nonexistent on a few things like [how] CBDCs can influence the banking system.” CBDCs can influence the transaction demand for deposits in the banking system, he said.

“To the extent that that happens, the creation of deposits would be negatively affected and to that extent, the ability to create credit by the banking system also decreases… of deposits could increase, leading to a slight increase overall. upward pressure on the cost of funds in the system itself,” he said.

The other implication would be for monetary policy, he said, adding that surveys by BIS and others seem to indicate that most central banks believe this will have an impact on monetary policy and transmission.

With regard to stable coins, he said, it could pose a much greater threat to dollarization than a cryptocurrency.

Stable coin is a type of cryptocurrency backed by assets.

Cryptocurrencies are so volatile that they cannot be used for small-value transactions, he said, citing the example of Tesla where it announced that cryptocurrencies could be used to buy its cars. The company later withdrew the decision given the volatility of cryptocurrencies.

Furthermore, Mr. Sankar said that RBI and the Monetary Authority of Singapore (MAS) would soon link their respective fast payment systems.

Under this initiative, India’s domestic payment system, the Unified Payments Interface (UPI), will be linked to PayNow in Singapore.

The UPI-PayNow link allows users of either of the two fast payment systems to make instant, low-cost, reciprocal transfers without having to switch to the other payment system.

Speaking at the event, Chief Economic Adviser V. Anantha Nageswaran said that even the introduction of CBDC does not remove the need to regulate cryptocurrency as they will continue to exist.

Finance Minister Nirmala Sitharaman had announced in her Feb. 1 budget speech that the RBI would issue digital rupees, or CBDC, in the coming fiscal year.

She had also announced that from April 1, the government will impose a 30% tax on profits made from other private digital assets.

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