The impending central bank digital currency rumble

However, the increasing number of Indians in these new-age properties has left policy makers stunned. Reserve Bank of India (RBI) governor Shaktikanta Das said last month that crypto assets pose a threat to India’s financial system. The government is now planning to introduce a bill regulating crypto assets in the country. The details are not clear. One possibility is that crypto assets such as bitcoin will continue to be allowed as an investment option, but will be banned as a currency used for economic transactions. The government will also pave the way for the RBI to introduce its own digital currency. A senior RBI official has said that the pilot launch of the central bank’s new currency could happen in the first quarter of the next financial year.

An Indian Central Bank Digital Currency (CBDC) is indispensable. A survey of central banks by the Bank for International Settlements earlier this year showed that 14% of the institutions surveyed had launched pilot projects, while 60% were experimenting with technology. Much has already been written on the supply side of a CBDC opportunity – whether it will initially be open to retail or wholesale payments, domestic or international payments, and how to make it interoperable with existing payment systems for data security. could. Anxiety, for example.

However, it is also important to focus on the demand side of the CBDC opportunity. How will ordinary citizens react to a CBDC, which will actually give them an opportunity to bank directly with the RBI? Families typically keep most of their liquid financial assets in bank deposits instead of cash, or in bank money instead of central bank money. The CBDC will provide them with an option other than cash to make payments or hold the money of the central bank to protect the value of their savings.

When it comes to understanding the potential demand for CBDCs from the private sector, three issues should be highlighted.

First, a lot depends on what families think of their balance sheets. In India, for example, the domestic balance sheet has 17.3 trillion bank deposits, compared to 2.4 trillion cash. If cash is converted into CBDC holdings, it will have minimal impact, as one type of central bank money is being converted into another. However, the sudden transfer of financial savings from bank deposits to CBDCs can create financial instability, especially in times of economic stress. In 2016, people forcibly converted their cash into bank deposits, or central bank money, into bank money in the early weeks of demonetisation. Now think of it as a permanent feature of the financial system.

Second, the way families dynamically move from one currency to another will depend on the design of our CBDC. One of the major factors influencing such behavior would be the interest rate offered on CBDC holdings. Zero interest rates on these holdings would mean that they are indistinguishable from cash, which is also a zero-interest liability of the central bank. People would then only hold the CBDC for payment. However, if interest rates are involved and the CBDC becomes a store of value, the situation will become more complicated. Furthermore, the ease of accessing a CBDC, for example through existing digital wallets or the United Payments interface, will be an important determinant of household behavior, particularly CBDCs, switching between cash and bank deposits.

Third, quantitative projections from many economists suggest that demand for CBDCs will be sensitive to macroeconomic factors such as household income, income distribution, portion of household financing of the banking system, etc. Most of the projections currently available are for prosperous economies, so further work is needed in the Indian context. For example, Bank of Canada economist J. Lee used household survey data to estimate that the expected demand for CBDCs by Canadian households could range from 4% to 55% of their combined holdings of cash and bank deposits, depending on Canada’s design. Is. Sovereign digital currency.

Economist James Tobin proposed in 1985 that households should be allowed to hold direct accounts with the US central bank. The development of new digital technologies now makes this possible. Much of the ongoing debate on Indian CBDCs has centered around what RBI should do; Little attention is paid to the equally important question of how families will respond.

One final technical point: the demand for money is as important as the supply of money in monetary economics. The same should be the case for CBDCs. Unstable demand for money has attracted central bankers since financial liberalization in the mid-1980s, expanding private sector portfolio options in both households and businesses. The same will happen with CBDCs. Monetary management will become more complex.

Niranjan Rajadhyaksha is a member of the Academic Board of Meghnad Desai Academy of Economics