Synopsis–If cryptos lack ‘money-ness’, BharatCoin, the presumptive name for an RBI-issued digital currency, would be a natural evolution of digitisation of financial flows. India has been at the global forefront of digitisation for decades now. BharatCoin won’t replace cash. But it has the potential to change monetary policy operations and financial markets in a manner that would rival the onset of central bank-governed fractional reserve banking.
Cryptocurrency is an idea whose time has come. However, in India, cryptos remain a Schrödinger’s cat — not quite alive, but also not quite dead. GoI’s recent proposed legislation seems to wish to kill one aspect of this ‘alive-dead’ state by banning private cryptos and invigorating the other by okaying a central bank digital currency (CBDC) issued by RBI.
Fear of cryptos complicating monetary policy is structurally unfounded. For a while now, former European Central Bank president Mario Draghi’s dictum, ‘whatever it takes’, has been the calling card of monetary policy: let currency printing presses work overtime, as long as retail inflation remains under control. This has meant that global base money — the amount of money printed by central banks — has gone up 8-9 times in the 21st century.
Bitcoin (BTC), the bellwether crypto, on the other hand, is by design a supply-capped asset. Algorithms defining the mining of BTC progressively reduce the total number of tokens that can be mined every year, with a hard cap at 21 million of aggregate supply. In other words, it is at the opposite end of what monetary policy wisdom currently is.
Given that progress and value addition are not limited by time and, hence, can’t be stonewalled by a supply-constrained currency, this by itself pales the potential of cryptos as an alternate currency. Add to this, super-high volatility in prices — ironically, in part, due to global monetary policy. Cryptos look more like gold and penny stocks, alternate investments that are presumptive hedges against macro weaknesses, rather than an alternative currency.
Ergo, banning them does no good to monetary policy operations, while potentially circumscribing India’s participation in an exciting new technology frontier.
If cryptos lack ‘money-ness’, BharatCoin, the presumptive name for an RBI-issued digital currency, would be a natural evolution of digitisation of financial flows. India has been at the global forefront of digitisation for decades now. BharatCoin won’t replace cash. But it has the potential to change monetary policy operations and financial markets in a manner that would rival the onset of central bank-governed fractional reserve banking.
Narayana R Kocherlakota, in her 1998 paper ‘Money is Memory’ (bit.ly/2ZDK7), articulated that money is a proxy for a complex interlinked web of bilateral IOUs recording who owes what to whom. That is, the economy’s memory. If digital currencies have to carry on being the economy’s memory, then, as Codruta Boar and Andreas Wehrli argue in their January 2021 paper (bit.ly/3pL8tXE), CBDCs would need to take precedence, guaranteeing trust and stability.
BharatCoin fits the bill. Digital central bank liabilities — all fiat money being central bank liability — already exist: central bank reserves (CRR). These are completely digital, with all transactions in them done via computer keystrokes.
They also happen to be one of the prime levers of monetary policy operations. The only caveat: reserves are only accessible to banks. BharatCoin would merely extend centuries of central bank experience with digital currency to hoi polloi.
If RBI provides direct retail access to BharatCoin and pays an interest on the same, it is as close to ‘perfect money’ as it gets, better than all existing forms of RBI liabilities.
This has important ramifications for monetary policy conduct. For starters, direct retail access to interest-bearing BharatCoin will dramatically alter power equations in monetary policy setting. With depositors having a choice between bank deposits and BharatCoin, the need to persuade banks to pass on policy rate actions would go down.
It will be immediately passed on to depositors via their BharatCoin holdings. Further, when customers swap their bank deposits for BharatCoin, banks will need to resort to additional borrowing from RBI (besides from capital markets), strengthening the levers of monetary policy transmission. Second, it takes away the 0% as the hard lower bound for interest rates, as banknotes have a minimum of zero interest rates.
With CBDC, the lower bound can be extended to negative interest rates too, thereby opening further channel for monetary transmission. Today, with banknotes being hardwired to zero, changing central bank rates below zero has inefficient transmission down the system, even accounting for the inconvenience of physical banknotes. The decades-old experience of Japan and Europe makes it a plausible scenario for India in the future.
Third, BharatCoin will enable a faster winding down — even abolition — of high-denomination banknotes. Besides removing the zerolower bound on interest rates, absence of high-value banknotes will help contain money-laundering and illegal financial transactions. Cryptos represent a brave new world, one where India has structural legacy advantages. Let the crypto cat unambiguously live.
The writer is managing partner, ASK Wealth Advisors