RBI’s digital rupee may undermine fiat INR and banking sector

It is widely known that cryptocurrencies led by Bitcoin (used metaphorically for all cryptocurrencies) fluttered the dovecotes of central banks, sending a chill down their spines. Their riposte was the Central Bank Digital Currency (CBDC). Some 105 nations of the world, through their central banks, are on the job. 

The Reserve Bank of India (RBI), not to fall behind, has been rather hyperactive. It has run a pilot study on the wholesale segment and is now running a pilot study on the retail one.

So, does CBDC have anything concrete to offer compared with the existing fiat currency in the Indian context beyond the novelty and “me too” factors?

Every experiment is judged on the touchstone of the achievement of its objectives. The demonetisation of November 8, 2016, rendering ₹500 and ₹1,000 notes non-legal tender in one stroke, thus snuffing out 86% of the currency in circulation, had the objectives of stopping terrorism funding, unearthing black money, and ending counterfeit currencies. 

Six years have passed and there is no evidence that any of these three objectives has been achieved even partially. If anything, the fact that as much as 99% of the banned currencies found their way into the banking system blithely belies any hope of even giving a post-facto justification for the cataclysmic move that foundered on the rocks of implementation and remonetisation.

Objectives of CBDC

The unstated objectives of the RBI’s digital currency are weaning away the laity from the dangerous Bitcoin, providing the advantages of blockchain technology to the users of the Indian rupee (INR), and lending assurance to the users of digital INR that the RBI stands behind it rock solid and, hence, no one needs to harbour fears about counterfeit INR floating around to that extent.

Also read: Launch of e-rupee a landmark, will change way business is done: Shaktikanta Das

Let the above-unstated objectives form the backdrop for the ensuing discussion. The CBDC was a knee jerk reaction by central banks and governments to the disruptive upstart Bitcoin. Were all of them hyperventilating, at least in hindsight, now that Bitcoin has been humbled in the market? It was at best a flash in the pan and at worst a disruptor. 

The cognoscenti knew that Bitcoin had no body to be kicked and no soul to be damned. It had no underlying asset and no regulator. Fiat currencies admittedly have no underlying asset either, but at least they have central banks regulating them.

Let’s face it: Bitcoin soared to $60,000 thanks to its scarcity value — only 21 million coins could be minted, of which as many as 20 million have already been minted — and its anonymity. And, by the way, Bitcoin has its own adherents apart from those seeking anonymity — speculators who look for booking capital gains from its volatility. 

The digital rupee does not appeal to speculators, as it is valued and accepted on a par with its parallel currency, the fiat INR. So, all central banks, including the RBI, seem to have been guilty of missing the wood for the trees.

Pros and cons

Those in the know say that the main advantage of blockchain technology is that it is tamperproof. Is that reason enough for the RBI to go to town with the digital INR, running down in the process its own fiat currency that will run parallel to the digital rupee? Remember, the fiat INR would be alive and kicking. Anyone can choose between the digital rupee and the fiat rupee.

Also read: RBI to launch e-rupee on pilot basis, releases concept note

They are fungible, too. So, I can convert, say, half of my savings account balance into digital INR by applying to the RBI. It will credit the money thus transferred to my digital wallet, and I can use the wallet to pay merchants and make transfers through my mobile phone just as I have been doing through GPay. And since it is fungible, I can transfer back from such a wallet to my bank account anytime, all in a clutter of confusion.

But during the time I toy with the RBI wallet, I have to forego the interest because the RBI is offering not interest but the assurance that my wallet is neither contaminated, nor amenable to hacking. And to the extent that people transfer their balances in commercial banks to the RBI wallet, the former’s lendable deposits come down. 

Will the RBI be then guilty of cannibalising the fiat currency and commercial banks to the extent that it weans away bank deposits? Will the RBI be stepping on the toes of the banks it is supposed to promote and regulate? Will it not be clipping their wings?

It seems CBDC or digital INR has but superficial advantages over the fiat INR. It is moot if the RBI would be facing the conflict-of-interest charge when it comes to taming inflation by mopping up excessive cash sloshing around. Would it freeze the digital wallets when inflation spins out of control?

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)