India must move towards a central bank-controlled digital currency

| Updated on June 01, 2020 Published on June 01, 2020

China is on road to launching a sovereign backed digital currency. It’s central bank-backed digital currency, Digital Currency Electronic Payment, is being pilot tested

Even as policy-makers across the globe are focussed on containment of the Covid-19 pandemic, China is quietly bringing about a revolutionary change to the currency and payment system; one that India may have to follow soon. It’s central bank-backed digital currency, Digital Currency Electronic Payment (DCEP), is being pilot tested in Shanghai, Chongqing, Shenzhen, Hangzhou, Suzhou, as well as Xiong’an New Area of Hebei since end of April; this pilot programme was initiated in Beijing in December last year. This expansion signals that China may be the first to launch a sovereign backed digital currency. The growing popularity of virtual currencies such as Bitcoin, over the last decade, had made most central banks look seriously at launching a digital currency controlled by them that can address the shortcomings of virtual currencies, while hastening the shift towards a cashless society. In a survey conducted by Bank for International Settlements, around 80 per cent of the 66 responding central banks said they have begun working on central bank-issued digital currency (CBDC) in some form. Besides China, Sweden has made good progress with its e-Krona project.

China’s DCEP can be stored in a mobile wallet like other cryptocurrencies and is pegged to China’s fiat currency in the ratio of 1:1. It appears to be a two-tiered structure, wherein the central bank interfaces with the financial intermediaries, who in turn interface with the public. It is superior to the current bunch of virtual currencies on many grounds. One, it is being designed and launched by a central bank and can, therefore, be accepted as legal tender in any monetary transaction. Two, since it is pegged to the fiat currency, it will not witness the stomach-churning volatility that is common in other crypto assets. An important difference is that while the DCEP will be based on the digital ledger technology, the ledger will be centralised. Also, creation of new units will be in central bank’s control, to enable it to control money supply and effectively implement monetary policy. There will be significant saving to the government in not having to print and manage physical money and the reduction in tax evasion can lead to higher revenue. There are however concerns that using a digital currency will be akin to serving data regarding all your financial transaction to the government on a platter. These concerns will have to be addressed by the Centre as India looks at its own digital currency project.

India’s plan to move away from physical cash to digital payments, an objective articulated in the demonetisation programme, will also get a fillip if the launch of a CBDC is hastened. While the RBI in April 2018 prohibited entities regulated by it from enabling transaction in cryptocurrencies such as Bitcoin, it has not made much progress in launching its own digital currency yet. It is time that the central bank hastened the launch of India’s CBDC.

Published on June 01, 2020
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