Is it a revolution? Going by the successive and unequivocal pronouncements made by RBI Deputy Governor T Rabi Shankar, central bank digital currency (CBDC) is almost in our living room, seeking to make a griha pravesh by the “end of this year.”

We may be wondering why this tearing hurry? Is it because of the surging interest Indians have shown in crypto assets (currencies) during the lockdown? Reports suggest that in the first half of 2021 alone, the crypto business has grown more than 12 times in the country’s largest digital currency exchange (WazirX). The digital bourse claims its registered users have quadrupled in the second quarter of 2021 to hit 6.5 million while trading volume in June reached $6.2 billion. The exchange has “signed up more users in the last four, five months than we have in the last three years”, says Nischal Shetty, co-promoter of WazirX.

Is this because of the phenomenal rise in the number of individual investors in India’s stock markets that has increased by a whopping 14.2 million in FY21, according to an SBI report? Retail ownership of companies listed on the National Stock Exchange (NSE) reached an all-time high in the June quarter, touching 7.18 per cent, compared to 6.96 per cent in March, or 6.89 per cent five years ago ( Investors have been clamouring for avenues that can bring quick returns and cryptocurrency has emerged as a perfect fit.

The shift to remote work has propelled an unprecedented spike in Internet penetration during the lockdown. Besides, central banks across the world have resorted to massive pump priming hoping to rescue their economies from the Covid quagmire.

Has the galloping interest in digital retail prodded experimentation with crypto assets in the face of a rising inflation and fall of bank deposits as a reliable asset class? As regard the impending parachuting of CBDCs in many developing and emerging economies, central banks all over have a difficult choice to make; they have to either find ways to compete or risk witnessing private (Bitcoin) and commercial cryptocurrency (Diem by Facebook) erode their monetary authority.

The Black Box

Let us now try to clear some cobwebs on CBDCs.

How does CBDC differ from physical cash and the money in our bank account? Can digital rupee be felt like the way we handle and count cash or write a cheque? Can it be stored the same way we put a currency note inside a shirt pocket? Will it be possible to store CBDC secretly? Can it be passed on to someone in an anonymous manner? Will it completely replace physical cash? And finally, will it be attractive like the earlier 1000 rupee note?

The digital rupee (IndCoin?), may be with an iconic symbol, as decided by the RBI, will appear on our smart phones and other digital devices. It may be pegged one-to-one with the Indian rupee and will be available to people and businesses to buy and sell goods and services and send money to each other, without fail. It will be most useful during natural calamities when physical movement of cash becomes a challenge, in remote and sparsely populated areas having communication bottlenecks.

The cash hoard experienced during lockdown may be a thing of the past provided digital rupee establishes itself and assures the users of its 24X7 availability and stability. The digital rupee is expected to reduce service delivery costs, increase transactional efficiency, and financial inclusion.

On the other hand, the money sitting in our bank accounts may not be available to us in times of physical disturbance and dislocation, technical outages or in the extreme scenario, insolvency of a bank. As regard confidentiality in transactions, CBDCs could be covered under existing banking secrecy laws and it needs to be examined whether it comprises personal data

Unlike crypto currencies which can be lost and stolen, CBDCs will be an alternative to physical currency, safe, robust and convenient payment instrument. Crypto currencies are issued or minted by private sector. They are neither backed by assets such as gold and foreign reserves, nor issued by the central bank with full guarantee of the government. They do not represent the liability of any central bank or government.

CBDCs are different. Central banks owned by governments or enjoying independent statutory status are its creators. And they are duty bound to not turn its destroyer. Further, cryptocurrency, when in wrong hands, can also finance illegal and anti-social activities. CBDCs can leave behind trails; but it can be remedied through tokenization. Whether it can be transferred anonymously and accumulated secretly will depend upon the operational architecture designed by the central bank.

Digital rupee, when introduced, will not completely replace or drive away physical currency from circulation. It will not replicate electronic money either. Even developed nations have not thought of doing away with cash altogether. However, it is expected that the use of cash will continue to go down, reducing its universal acceptability and prevalence of electronic retail money would reach critical levels.

CBDCs, if successfully implemented, can lead to loss of business for credit and debit card issuing banks and supporting companies.

CBDCs are not designed to compete with crypto currency. Crypto assets are based on technology designed to circumvent authority and banish central bank money to create economic anarchy. They have become popular more as an investment vehicle and less of a medium of exchange. CBDCs on the other hand will essentially track physical currency. Whether it can emerge as an instrument of investment will be dependent on its design, ease of availability and fluctuations in value, if any. CBDCs will have to be a public good provided by the central bank. The pandemic has pushed consumers to go increasingly cashless and CBDCs might complement, rather than replace, physical cash in the system.

The Future

According to a PWC report (June 2021), “no country has officially launched a large-scale CBDC regime” and “it is anticipated that China will transition to mass adoption of a CBDC by the Beijing Winter Olympics in 2022.” CBDC is a new technological innovation faintly pitted against another innovation — the crypto currency. The biggest challenge for monetary authorities would be to restrict the use of CBDC within national boundaries.

The PWC report asserts that “it is highly probable that the future of money will be a mix of centralised, decentralised, account based and token based with CBDCs, stable coins and crypto currencies co-existing alongside traditional digital and physical currencies.” It is difficult to disagree.

The writer is a former Chief General Manager, RBI. Views are personal.