Digital Currency: Banks Raise Disintermediation Concerns Over RBI’s Digital Currency Plans


Mumbai: Government and Reserve Bank of India (RBI) conduct detailed analysis on the impact that a central bank digital currency (CBDC) would have on the Indian banking sector as a whole, and what reduced disintermediation would mean for commercial banks which have so far all the cards in hand as intermediaries.

Although CBDCs have been discussed in recent years, a fully operational CBDC has yet to be implemented anywhere.

However, in recent months, countries like the Netherlands, Sweden and China have already started piloting CBDC projects using distributed ledger technology.

Banking players have been concerned about the potential drop in deposits, the disruption of the debt market, the reduction in credit creation and the impact on lending rates due to the retail CBDC, two people at the bank said. current of evolution.

RBI is looking to launch a Specific Purpose CBDC in the wholesale and retail segments. The government, through Niti Aayog, is contacting various stakeholders, including banks, they said.

“Many bankers have expressed concerns about the retail CBDC,” a person familiar with the development told ET. “They fear that if the central bank adopts the function of storing and distributing digital currency, removing banks as a middleman between Indian citizens and the RBI, it could have a lasting impact. Retail CBDC and not the big chunk, ”he said.

Currently, the RBI is the only authority that prints the Indian Rupee.

Banks fear that in the case of a digital currency printed (in digital form), stored and distributed by the RBI, their existing models will be disrupted.

“The government could first look at the wholesale CBDC. As for the retail CBDC, there are ways to address some of the concerns, ”said another person familiar with the development. He said one of the solutions could be a closed retail CBDC.

“At the initial stage, the central bank could introduce something like a pre-funded wallet for banks. These would have digital currencies that banks could use for specific purposes,” the person said, adding that currently, this does not. are only proposals and that the government take one last call on this front. On the wholesale front, the CBDC might see a smoother rollout.

The government could deploy a blockchain-based CBDC that could be used by banks to settle accounts late in the day to node accounts, one of the people said. Compensation is currently done in digital form, but the CBDC would be based on a separate technology, the person cited above said.

RBI Vice Governor T Rabi Shankar recently said that most of the work has been done on the wholesale account-based route, while a little more time is needed on the digital currency based on selling to the detail. In July, Shankar acknowledged that retail CBDCs may present some risks.

“If banks start to lose deposits over time, their ability to create credit is limited. Since central banks cannot provide credit to the private sector, the impact on the role of bank credit needs to be well understood. In addition, as banks lose large volumes of low-cost transaction deposits, their interest margin could be strained, causing the cost of credit to increase. Thus, the potential costs of disintermediation mean that it is important to design and implement the CBDC in a way that makes the demand for CBDC, on bank deposits, manageable, ”Shankar said.

This coincides with the government’s plan to regulate cryptocurrencies through a framework in India.

The government was initially looking to introduce regulations for crypto assets during the winter session, but that now appears to have been postponed.

The RBI has raised concerns about the legalization of cryptocurrencies such as Bitcoin and Ethereum in India. Governments around the world have struggled with digital currencies over concerns about tax evasion, money laundering, and possible manipulation of exchange rates and money supply.

Several officials from the Department of Finance, RBI, tax services and investigative agencies, including the Financial Intelligence Unit, have also expressed concern about how, in their current form, cryptocurrencies constitute a ” systemic risk “not only to security but even to the Indian economy, ET reported on Dec. 11.

The government is now considering whether there is a need to broaden the consultation and solicit public comment, as well as whether the CBDC to be introduced by the RBI should be part of the cryptocurrency bill or should be dealt with under. of RBI, ET reported on Dec. 15.

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