INSUBCONTINENT EXCLUSIVE:
India has surprised the payments world by announcing that its central bank will issue a digital currency as early as the coming financial
year, a crucial decision that most other major economies are refusing to make in a hurry
According to Finance Minister Nirmala Sitharaman, an electronic representation of India's legal tender will give a big boost to its
How valid is that claim, and how risky is a hasty transition to a central bank digital currency, or CBDC?A digital rupee will be like
banknotes, but minus the ATMs
Users will be able to transfer purchasing power from their deposit accounts into their smartphone wallets in the form of online tokens,
deal in countries with well-capitalized financial systems
But this is a major benefit in India
As researcher Bhargavi Zaveri observes in the blog IndiaCorpLaw, depositors at 21 Indian lenders have been restricted from withdrawing their
funds due to bank distress in the last few years
she says.Consumers may find the digital rupee to be a safer alternative to bank deposits, which underpin Rs 76 lakh crore ($1 trillion) in
If electronic cash becomes popular, and the RBI places no limit on the amount that can be stored in mobile wallets, weaker banks may
struggle to retain sticky, low-cost deposits
And even as they lose that cushion, lenders may be reluctant to shed their loan assets and sacrifice profits
Yet, advanced nations also worry about the dwindling use of banknotes, especially after the pandemic
such urgency because cash is far from dying
Banknotes account for about 15% of money supply, compared with 1% in Sweden
Yet, the Riksbank is in no hurry to embrace CBDCs
After five years of weighing different architectures and running pilots, the Swedish monetary authority is still to take a final decision on
whether to issue an e-krona.Add image caption hereThe United States Federal Reserve is seeking the public's views on whether to provide
an official tender to compete against private stablecoins riding on the dollar as the world's most popular unit of account
The digital euro is in a 24-month investigation phase
If all goes well, the European Central Bank may offer it by 2025
Japan may delay a call to 2026
After judging the risks and rewards, Singapore has taken a pass on CBDCs for now.India's rushed deadline seems to be at least partly a
response to the growing popularity of cryptocurrencies, though it's hard to see how an unremunerated means of payment can wean the public
the digital yuan at the Beijing Winter Olympics
By early November some 140 million individuals had signed up for the e-CNY
But even in the People's Republic, there is no national rollout date, and Alipay and WeChat Pay retain their stranglehold on electronic
so-called Greater Bay Area.Any role for a digital rupee in India's fast-growing online economy is fuzzy
Unlike perfectly anonymous cash, most CBDCs will be designed so central banks will have the power to trace spending to check
However, transactions conducted with them may not be visible to payment apps
The fintech industry may lose access to some of the data that it is currently mining with artificial intelligence to make cheap loans
available to those who do not possess collateral or business and tax registrations, such as mom-and-pop stores.There will also be gains,
though they won't be immediate
Once international corridors are in place for exchanging one CBDC into another, there won't be any need for an expensive network of
correspondent banks to settle cross-border payments
For Indians working abroad, sending money home will become simpler and cheaper, leading to substantial savings for the world's No
1 recipient of foreign remittances
However, some of those benefits are possible even without a digital rupee, via a global network of bank-based online payment systems
For one thing, it may not be a bad idea for the monetary authority to use technology to put bank managements on notice: They need to stop
taking depositors for granted
Still, that lesson is probably best administered after lenders have put the pandemic-related stress on their balance sheets behind
them.Besides, the RBI needs to do its homework
The technology, blockchain or otherwise, will need to balance the often-conflicting goals of speed, scalability, auditability, security and
privacy, something the Fed is attempting to do as part of its Project Hamilton initiative
Given India's still-vast digital divide, a protocol for offline use has to be worked out
Rushing the implementation of what should ideally be a multiyear project may be fraught with unnecessary risks.(This story has not been
edited by TheIndianSubcontinent staff and is auto-generated from a syndicated feed.)
