The RBI should start working on an official cryptocurrency for India
With the European Central Bank expressing its intention to evaluate a Central Bank issued Digital Currency (CBDC) for the Euro Zone, it is apparent that regulators can no longer shrug aside digital currencies as a passing fad, or look upon them with suspicion. ECB President Christine Lagarde’s statement that the Bank may be ready to launch a digital currency in two to four years, viewed along with the public consultation on CBDC initiated by the ECB, suggests that the EU is serious about launching an official digital currency to boost digital payments. China may, however, be the first in this race; work on a CBDC has already begun and the Digital Currency Electronic Payment (DCEP) is currently being pilot tested in many Chinese cities. The need for a digital currency arises from two main factors: marginalising the use of ‘cryptocurrency’ by anonymous non-State actors, often for nefarious ends; and moving to cashless transactions to curb tax evasion. Indian regulators are yet to start work on developing a government-backed digital currency, though there were reports of the RBI exploring its feasibility around three years back. Other countries including the US and the UK are also treading cautiously, awaiting thorough due diligence before venturing into this space.
The advantages are numerous. One, official digital currencies can play an important role in weaning users away from using cash, which will help control tax evasion. Two, CBDCs will be pegged to the fiat currency and hence will not witness the volatility being seen in crypto currencies. Three, official digital currencies will be legal tender with sovereign backing, thus protecting consumers. Four, it will help distract investors from the current bunch of crypto assets that are highly risky. The feasibility study, design, testing and implementation are likely to take years, once the RBI decides on this path. It would, therefore, be best to set up a committee to begin working on this project — looking into its impact on macroeconomy and liquidity, banking systems and money markets.
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