RBI Calls Digital Currencies A Mixed Blessing

The Reserve Bank of India sees a central bank-backed digital currency as a mixed blessing—such virtual tokens can take away low-costs deposits from banks with implications for the economy, while also increasing financial inclusion and transparency.

“CBDC can be designed to promote non-anonymity at the individual level, monitor transactions, promote financial inclusion by direct benefit fiscal transfer, pumping central bank ‘helicopter money’ and even direct public consumption to a select basket of goods and services to increase aggregate demand and social welfare,” the RBI said in its report on currency and finance published on Feb. 26.

Interest-bearing digital fiat can also increase the economy’s response to changes in the policy rate, the RBI said. In emerging markets facing large scale-capital inflows, such a currency can act as an instrument of sterilisation, alleviating the constraint that a finite stock of government securities in central bank balance sheet poses, it said.

On the downside, central-bank backed digital currencies pose a risk of disintermediation of the banking system. More so, if the commercial banking system in a country is considered to be fragile.

“The public can convert their CASA (current account savings account) deposits with banks into CBDC, thereby raising the cost of bank-based financial intermediation with implications for growth and financial stability,” the regulator said in its report. In countries with large credit markets, it said, banks may lose their primacy as the major conduits of monetary policy.

To limit disintermediation, a proposed solution is to introduce a two-tier remuneration system for CBDCs—transaction balance held by an individual remains interest-free and is subject to a ceiling; while CBDC balances over and above the ceiling are subject to a penal negative interest rate.

Since CBDCs provide anonymity, they may also have implications for cross-border transactions. To curb this, appropriate safeguards would need to be laid down under existing anti-money laundering and combating financial terrorism laws.

The central bank’s views on CBDCs come a day after RBI Governor Shaktikanta Das said broad guidelines on issuing central bank digital currencies would come out soon. While addressing members of the Bombay Chamber of Commerce and Industry on Thursday, Das said a lot of work had been going on at RBI on central bank digital currencies and that it was “resolving some issues”.