Take a cautious approach when launching a digital currency, report says
India should take a cautious and gradual approach to launching a central bank digital currency (CBDC) as its development could pose certain risks, including those to institutions, end-users of retail CBDCs and the reputation of the central bank. , says a National Council working paper from NCAER (Applied Economic Research).
The paper was co-authored by Poonam Gupta, chief executive of NCAER and a part-time member of the Economic Advisory Council to the Prime Minister.
“We argue that many of these arguments for CBDCs have been made uncritically. Their proponents fail to recognize that some of these goals can be advanced at lower cost and lower risk by alternative means,” the report states.
The document states that while a CBDC would have more penetration compared to credit or debit cards, the reach of the unified payment interface is already widespread. “In its history to date, UPI has hosted some 70 billion transactions, some as small as one rupee, making it the largest transaction-based real-time payment system in the world,” he said. .
The document states that while greater financial inclusion is also one of the reasons for pushing the CBDC, it can also be achieved by simply opening more bank branches in rural areas and providing services through partners and non-bank agents.
“A third rationale sometimes heard for issuing CBDCs is to allow the central bank and government to retain control of the payment system in the face of stablecoins and other private payment rails. If the problem is the concentration of payments in one or a small set of private hands, then the obvious solution is to increase the regulation of these private providers,” he said.
“Given the range of questions yet to be answered, India should take a cautious and gradual approach towards launching a CBDC. make available an analysis of the rationale, impact, scope, design and pace of the launch of its CDDC pilots, and then of the digital currency itself,” the report states.
The RBI will need to assess the readiness of banks, other financial intermediaries and the public to use this digital currency; its impact on the conduct of monetary policy and its transmission; and its implications for capital flows, the exchange rate, and the composition and management of foreign reserves.
“As has been the case with other initiatives, groups of experts should be set up and consulted and their analyzes and recommendations made public. It could then take another two to three years to run pilots and evaluate their results,” he said.
In the Indian context, it will be important to analyze the benefits and challenges of the availability of CBDCs for population groups with different levels of literacy, access to hardware and internet connectivity, and to adjust strategies for design and deployment in light of this analysis, the report said.