It was American Nobel Laureate James Tobin in 1980s who toyed with the idea of Federal Reserve Banks in the United States to make available to the public a widely accessible ‘medium with the convenience of deposits and the safety of currency.’ This was the topic of a Keynote address delivered by Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India – July 22, 2021 – at the webinar organized by the Vidhi Centre for Legal Policy, New Delhi. The address is reproduced below for authentic reference.
It will be my intention to explain in simple terms the details of digital currency, its usage or its consequences on future monetary market for which the following web information will be extensively used to give authenticity and clear understanding. Today, none can equate with RBI deputy governors who rank among the best central bank executives of the world.
Yes, a couple of decades passed away inviting pointed reference today to provide the public with virtual currencies, that carry the legitimate benefits of private virtual currencies while avoiding the damaging social and economic consequences of private currencies.
Let us discuss it with a contemporary resolution.
How is that digital currency occupies unique attraction among us, be it in private digital ones or the already digitalized version of every other form of transaction like bond, security, transaction or communication in digitalized form.
Central bank digital currency carries the legitimate benefits of private virtual currencies while avoiding the damaging social and economic consequences of private currencies.
Before one understands, explains or applies CBDC in details, the basic question is what is a currency, an age- old question in monetary economics.
As societies developed from hunters and gatherers, material needs increased – to build a house, wear clothes, make weapons and implements etc. Since these needs could not be produced individually, people had to purchase them from others. Barter system which came into existence could not sustain the demand or convenience of gold or silver coins which incorporated the benefits of barter system and the convenience of a currency.
Clay tablets in Mesopotamia or, as in China in the eleventh century, paper currency bear witness to our argument. Money took the form of either commodities (which have intrinsic value) or in terms of debt instruments.
It is equally true that when money does not have intrinsic value, it must represent title to commodities that have intrinsic value or title to other debt instruments. I agree that currency is a debt instrument and one instantly knows who would honor it. Due to multiple usage or lack of credit rating of a private issuer of a currency, sovereign currency came into existence. The following quotation from the speech partially leads us further.
“It offered stability to the currency due to credit rating of a sovereign which was far ahead of an individual. Secondly, paper currency involves seignorage – the difference between the intrinsic value and the representative value which accrues to the issuer. This seignorage should not accrue to any private individual. It should accrue to the Government and thus used for public spending.”
We now understand the definition of a currency as a form of money that is issued exclusively by the sovereign (or a central bank as its representative). Further, it is a liability of the issuing central bank (and sovereign) and an asset of the holding public.
So, currency is fiat, it is legal tender. Currency is usually issued in paper (or polymer) form, but the form of currency is not its defining characteristic.
Currency is a liability of the issuing central bank.
With the clear understanding of currency with historic attributes, one asks the question what is a central bank digital currency?
The distinguished speaker, an authority on monetary theory, by knowledge and practice, the deputy governor proudly said, “A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.”
Now that the central point is nailed, further discussions lead us towards our wider learning.
His next revelation was to realize what CBDC would not be. Compared with private digital currencies who survive by the deposits of banks and are not showing who is the issuer. They would not be illegitimate ones.
His apt summarization of central bank digital currency as “CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer). It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, form and use of a CBDC can be molded for specific requirements. CBDCs should be exchangeable at par with cash.”
Though lofty statements emanated from Deputy Governor of RBI, one would ask the following questions about CBDC.
The august speaker quoted the following justification for the digital currency.
“A 2021 BIS survey of central banks found that 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. Why this sudden interest?
The adoption of CBDC has been justified for the following reasons: –
i. Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency (like Sweden);
ii. Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan or even the US);
iii. Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.”
Emergence of the private digital currencies from unknown sources and the gross misleading of the investing public has also put pressure on central banks all over the world to think seriously about the digital currency, legally made and supported wholeheartedly.
In real terms, let us visualize how the digital currency helps an exporter?
If he receives his payments in digital form, he gets a sort of ready cash without any intermediary. The zone difference will not exist. There would be no “Herstatt’ risk.” Payments involving CBDCs are thus final and not subject to disputes.
What about India and its admirable past on using digital payments?
In simple terms, we surpassed everyone with Indian digital payment innovations, synonymous with the best performance in the world, an impressive of CAGR of 55% (over the last five years). It is unthinkable to another payment system like UPI that allows a transaction of one Rupee. With the impressive growth in the past, do we to think of CBDC?
The following pilot survey results enable us to think creatively.
Retail payment habits of individuals in six cities between December 2018 and January 2019, results of which were published in April, 2021 RBI Bulletin (please see charts on page5) indicates that cash remains the preferred mode of payment and for receiving money for regular expenses. For small value transactions (with amount up to ₹500) cash is used predominantly.
However, the following data enlighten us more:
Entry of private digital currencies,
The entry of private digital currencies with widest possible range of fluctuations has met with maximum reception from various entities even though these do not carry any sovereign guarantee and even the issuer is totally conspicuous by his/her absence. Yes, these private digital ones do exist.
Then, a natural argument in favor of central bank digital currency has arisen and also shaken up the monetary establishment, particularly with the best performance with digital payments in the world. One is tempted to quote: As Christine Lagarde, President of the ECB has mentioned in the BIS Annual Report “… central banks have a duty to safeguard people’s trust in our money. Central banks must complement their domestic efforts with close cooperation to guide the exploration of central bank digital currencies to identify reliable principles and encourage innovation.”
I have no option than agreeing that the case for CBDC for emerging economies is thus clear – CBDCs are desirable not just for the benefits they create in payments systems, but also might be necessary to protect the general public in an environment of volatile private VCs. India with the best performance for digital payments even for Re 1, can not postpone the discussion on CBDC.
With all theoretical cobwebs being swept away, let us analyze the entry of banks and digital ones from central banks.
One may start the argument that with legit- emic entry of digital ones from central banks, the need for bank deposits may wane and with no source of less cost funds by way of deposits, banks would find it very difficult to finance credit for various needs of entities. In a country like India, with maximum number of senior citizens, poor and middle class and all types of industries who either depend on deposits or credit from banks, the necessity arises to have the demand for CBDC vis-à-vis bank deposits manageable.
Presuming the existence of digital ones along with bank deposits, over a long- term basis, interest bearing bank deposits would prevail over digital ones.
Lot of upheavals is expected but lateral calm in currency market may be assured by the logical role of commercial banks to the society.
About monetary policy changes that may occur about huge demand for CBDC and subsequent release of the same through banks, leakage of currency from banking system may invite more liquidity in the market by the actions of central banks. These assumptions are just theoretical hypothesis since no central bank has ventured to issue a digital currency.
Are we technologically prepared to introduce population level digital currency with the introduction of the fastest internet, telecommunication networks, and available distribution of digital currency to all strata of population than the middle class and rich ones only? This alone would ensure storing and usage of the digital currency on a scale not yet visualized so far.
Let us learn what RBI is doing now with its would be digital currency?
RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption.
Some key issues under examination are –
(i) the scope of CBDCs – whether they should be used in retail payments or also in wholesale payments;
(ii) the underlying technology – whether it should be a distributed ledger or a centralized ledger, for instance, and whether the choice of technology should vary according to use cases;
(iii) the validation mechanism – whether token based or account based;
(iv) distribution architecture – whether direct issuance by the RBI or through banks;
(v) degree of anonymity etc.
(vi) However, conducting pilots in wholesale and retail segments may be a possibility in near future.
What laws would be affected by the usage of central bank digital currency?
Some of them are:
Conclusion of the speech
“Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk. Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits. It would be RBI’s endeavor, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems.”
My final observation
Is it that simple to have central bank digital currency for a poor and under nourished nation like ours?
Yes, when India ventured with UPI and Adhar, the Supreme court was invited to deliver the final verdict. With the best IT Technology, most available soft power human resource talent, and adequate financial help from central/state governments, the day is not far to hear Indian CBDC with whatever sweet name to lead India into digital currency era with the most unpredictable pleasant consequences.
That may be one of the ways to enter the most developed country status.
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