Digital currency: The govt would do well not to get carried away on CBDC

If financial inclusion is the goal of issuing CBDCs, it might not be worth it since UPI has been fairly successful in achieving it

The government is once again using a favourite tactic—"be clear in your opaqueness". This time it is with Central Bank Digital Currencies (CBDCs), while earlier, it was with cryptocurrency regulation in general. The finance ministry and the RBI have clearly stated that the RBI will soon issue a CBDC. No opacity there.

In her 2022 Budget speech, Nirmala Sitharaman said that the RBI would issue CBDCs "starting 2022-23". Several RBI and finance ministry officials have gone on record, saying that the latest timeline is early 2023. But everybody involved has also been very opaque when it comes to the contours of this rollout and what the benefit will be.

Meanwhile, the World Bank's April edition of its South Asia Economic Focus has struck a note of caution about CBDCs.

It says that "the introduction of CBDC could disrupt the existing financial-intermediation structure. In addition, depending on design and country context, CBDC could pose risks to financial stability, financial integrity, data protection and privacy, and cyber resilience."

The report adds that "it can have implications for the legal and regulatory framework, increased responsibilities of the central bank, and could also lead potentially to currency substitution, especially in the context of cross-border CBDC."

These are not offhand issues it has highlighted, which could potentially be dealt with following the issue of CBDCs. This is a comprehensive warning about the widespread risks from the issuance of CBDCs.

The point is this: the benefits of CBDCs would not only have to outweigh these risks but the risks themselves would have to be addressed individually.

And so far, neither the government nor the RBI has told us exactly what they think about these issues. If they are really serious, a more broad-based discussion is in order. But there has been no white paper or request for comments.

In her Budget speech, the FM said that the "introduction of Central Bank Digital Currency (CBDC) would boost the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system." True, but the benefits of CBDCs in this regard seem quite marginal.

This is so because of the fantastic penetration achieved by the UPI infrastructure the government has put in place. A massive boost to the digital economy is already taking place.

At last count, Rs 10.6 trillion worth of transactions were conducted in July on the UPI network, the highest ever in a long list of record-breaking numbers. UPI is accepted equally by street vendors and 5-star hotels, and mostly everything in between. So if financial inclusion is the goal of issuing CBDCs, it might not be worth it. That goal is already being achieved.

If the concern is lowering the cost of transactions and issuance of currency, then that's something worth considering.

However, before any such decision is taken, it would be interesting to see whether the RBI has calculated whether mining a digital currency—an extremely electricity-intensive exercise by all accounts—is cheaper than printing currency notes or facilitating UPI transactions.

Another option could be to explore if the existing UPI network can be shifted to the blockchain instead of issuing a new currency altogether. Someone has to look at the technical and technological options properly. If this is being done, the nation wants to know.

Unfortunately, the finance ministry and the RBI have been very reticent about even the most basic aspects of CBDCs. For example, what would their value be? Will they be pegged to the rupee? If so, what's the difference between a CBDC and UPI-transacted rupee? Otherwise, how would the CBDC be valued?

The Modi Government has been quite tech-savvy in the past. Most of the time, it has adopted solutions that are needed. That said, it's probably best not to get carried away and implement unnecessary changes.