India needs an RBI digital currency

It is welcome that India’s central bank is joining its peers in readying a digital currency. China’s central bank digital currency (CBDC) programme is the most advanced, the US has one in the works, and 14% of all central banks have pilot projects. Central banks perform four functions in payment.

One, it provides the means of payment, the unit of account. Two, it provides finality of payment. With cash, the finality is automatic. With other means, the finality occurs when the central bank debits and credits the net payments of banks. Three, it provides liquidity to ensure smooth settlement. Finally, as overseer and, often, regulator of banks, it provides systemic integrity and efficiency.

A CBDC makes all these more effective. RBI is debating whether it should be at the retail level or at the level of gross settlement. To make a real difference, the CBDC should be available for both wholesale and retail payments. Another crucial issue is whether it should be account based or tokenised. China has proposed a hybrid model; but if something is neither fish nor fowl, whether it would be some kind of a dinosaur, the evolutionary intermediary between creatures of the ocean and creatures of the sky, remains to be seen. Since use of blockchain technology allows smart contracts that are programmed to trigger certain actions when certain other actions are carried out, the account-based model seems clearly preferable to the tokenised model.

Some degree of anonymity can, perhaps, be built into the blockchain-based model that identifies accounts. A CBDC could prevent private payment system providers from monopolising transaction data, via the self-reinforcing loop of data, network externalities and activities, attracting ever more users. ACBDC can be extremely disruptive, however. It could allow every citizen to have an account with the central bank, for example. If you hold a bank account, your money is as good as your bank. If you hold your money directly with the central bank, it is always good. Wider debate is called for.

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