A nuanced, calibrated approach is essential for CBDC adoption, says RBI’s Sankar


It will greatly reduce the time for cross-border transactions and carry out transactions in real time

It will greatly reduce the time for cross-border transactions and carry out transactions in real time

Reserve Bank of India Deputy Governor T. Rabi Sankar said on Thursday that a nuanced and calibrated approach to launching India’s first digital currency was essential as it would have various implications for the economy and monetary policy.

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

“Given the many uncertainties about which model works, which design works well in terms of its impact on the banking system, privacy and monetary policy, almost all central banks and we will make no exception to a very careful and calibrated nuanced way,” he said at an event organized by ICRIER.

The essential learning doesn’t come from global experience, but essentially from your own experience, he said.

Noting that one of the tenets of adopting technology, especially for a central bank, is that it should “do no harm,” he said, “I think central banks would be very calibrated and graduated and assessing the impact on the ground.” down the line and then making those connections with what’s most in demand.” Referring to India, he emphasized that the RBI Central Bank regards Digital Currency (CBDC) without any distinction as a digital form of fiat currency.

Emphasizing that CBDC has cost and distribution efficiencies, he said the other motivation for adoption is settlement efficiency.

It will greatly reduce the time for cross-border transactions and conduct real-time transactions, he said.

Speaking of the effects of CBDCs, he said: “While these motivations exist, it is important to realize that there is virtually no global experience at this point in relation to some things, such as: [how] CBDCs could affect the banking system.” CBDCs could affect transactional demand for deposits in the banking system, he said.

“To the extent that this occurs, deposit creation would be adversely affected, and to that extent the ability of the banking system to create credit decreases…as low-cost transactional deposits move away from the banking system, the average cost of deposits could rise , which would generally result in a slight upward pressure on the cost of funds in the system itself,” he said.

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

Regarding stablecoins, he said they could turn out to be a much bigger 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 low-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.

In addition, Mr. Sankar said that RBI and the Monetary Authority of Singapore (MAS) would soon be linking their respective quick payment schemes.

As part of this initiative, India’s native payment system, the Unified Payments Interface (UPI), will be connected to Singapore’s PayNow.

The UPI-PayNow connection will allow users of either fast payment system to make instant, low-cost mutual transfers without having to dial into the other payment system.

During the event, Chief Economic Adviser V. Anantha Nageswaran said that even the adoption of CBDC will not eliminate the need for cryptocurrency regulation as it will continue to exist.

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

She had also announced that starting April 1, the government will levy 30% taxes on profits from other private digital assets.

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