RBI Governor Shaktikanta Das said at the post-policy meeting on Wednesday that India’s central bank digital currency (CBDC) will be equivalent to paper money in most respects, including anonymity of transaction. Sarthak Ray explains India’s CBDC imperative and what makes it different from other ways to transact.
RBI on CBDC anonymity
On Wednesday, RBI Governor Shaktikanta Das said the RBI Act amendment recognises Central Bank Digital Currency (CBDC) as fiat currency, so there is “no difference in the eyes of the law or in treatment” between paper currency and CBDC. The income tax department works with certain limits on cash payments and withdrawals, and these limits will apply to CBDC, Das had said.
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Deputy governor T Rabi Sankar said that either a technological solution or a legal provision can protect anonymity of transaction. The eventual path taken, however, will depend on how things evolve. In its October report, RBI had batted for “reasonable anonymity for small value transactions”.
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Concerns on anonymity
Experts say banks’ KYC norms will establish identity at the source of funds, when CBDC is drawn from a user’s account and put in his wallet. What RBI is talking of is the entire wallet-to-wallet trail that can potentially be tracked. Even as RBI says this will not be done, and a way to maintain anonynmity will be decided eventually, experts say that the technology it has adopted for the CBDC allows for tracking of transactions. Whether this will be “switched off” to facilitate anonymity till a legal or technological solution is adopted, remains to be seen.
The other issue is that daily cash transactions beyond `2 lakh are prohibited for most classes of users. Whether this or a different cap will apply to CBDCs, with KYC available for account-to-wallet transfers, also needs clarity.
CBDC & cryptos: How they differ
Cryptocurrencies promise freedom from regulation guiding the circulation of money, and are secured by consensus mechanisms. But their value depends on user/investor sentiment and even use-case, which builds in volatility.
On the other hand, CBDCs are backed by the central bank and will always remain equivalent to the banknotes they tokenise.
Difference with the UPI
There will be no routing/intermediation by banks when it comes to CBDC-R transactions.
UPI transactions, on the other hand, hinge on interbank messaging for amounts to be debited from one and credited to another. CBDC-R will be entirely dependent on wallets—though banks will credit the CBDC to wallets—and the transfer will be from one wallet to another, mirroring the banknote scenario.
Why is having a CBDC an imperative for India, and how will it operate?
For India, whose central bank (RBI) spent ~`5,000 crore in FY22 on security printing of currency notes, the imperative to bring down the costs of paper money is clear. RBI, though, had earlier said that its CBDC, the e-rupee, won’t replace other forms of money; rather, it would complement these. RBI says it will, inter alia, foster “financial inclusion” and “innovation in the cross -border payments space”.
CBDC will be of two broad types: retail (CBDC-R) and wholesale (CBDC-W). CBDC-R will be available to all classes of users while the CBDC-W will be available only to select financial institutions for settling interbank transfers and related wholesale transactions. Thus, CBDC-R will be like cash in hand.
Accordingly, CBDC-R will be token-based and CBDC-W will be account-based. CBDC-R will thus be a bearer instrument; the holder at a particular time will be presumed to be the owner. On the other hand, in the account-based system, the record of all balances and transactions of all holders of the CBDC will be maintained, with an intermediary veirfying the identity of the account-holder. CBDC-W was piloted in November and CBDC-R in December.
* 11 countries have fully launched CBDCs
* Ecuador cancelled its CBDC after a pilot
* Denmark’s feasiblity study in 2017 concluded CBDC had economic instability risks