The announcement in the February 1, 2022, budget speech by Finance Minister Nirmala Sitharaman that the Reserve Bank of India (RBI) would soon launch digital rupee has set the nation agog both with anticipation and doubts.
That Central Bank Digital Currency (CBDC) the world over has been a kneejerk response to the phenomenal rise of cryptocurrencies is undeniable.
Yet there are a number of imponderables that cannot be glossed over in our obsession with novelty as well as the desire to be seen in the company of Joneses. Let us see how the digital rupee would impact various stakeholders.
RBI
The banking regulator and the lender of last resort, the RBI would ironically and oddly become a bank itself to the extent the digital rupee liability would figure on its balance sheet. And to the extent people convert their regular current account savings account (CASA) balances into digital rupee, the banking system in India would receive a rude jolt—-their lendable deposits would come down sharply thus affecting their very raison d’ etre or bread and butter operations.
This denouement would be so disrupting that the bottom-line could be ludicrous— regulator elbowing out the players.
Commercial banks
There could well be an existential crisis for commercial banks with flight of deposits spelling their relegation to irrelevance and in sooner than later to possible extinction.
All digital payments like card, NEFT, IMPS and RTGS would come to a halt to the extent there is a shift of deposits to the digital rupee. And to that extent too their wings would be clipped when it comes to lending to businesses and households what with lendable deposits dwindling.
Depositors
Dark memories of restrictions on bank withdrawals are still fresh in people’s minds with Punjab and Maharashtra Cooperative (PMC) Bank and Yes Bank episodes sending fears down their spines. The risk-averse could as well settle for the interest-free digital rupee accounts with the RBI though senior citizens who too are generally risk-averse and seek the safety of bank fixed deposits would be torn between the two.
As an aside, it may bear comparison, albeit superficial, with deposits with the legendary Swiss banks. Swiss banks beckon those for whom secrecy is the be all and end all of their dalliance with Zurich. That Swiss banks do not pay interest hardly matters to them.
But for the vast majority of Indians safety rather than secrecy matters. So, the digital rupee could well entice those who do not mind interest-free deposits but whose withdrawal and redemption is guaranteed.
Investors
The elephant in the room is the investor or the speculator. Why does the quintessential cryptocurrency, bitcoin, beckon investors with appetite for risks? It is not peer to peer anonymous payment though for those who treasure secrecy, it could be the most important counter.
But vast majority has invested in bitcoin enticed by the humungous gains possible thanks essentially to its scarcity value—only 21 million bitcoins can be minted out of as of August 2021 18.77 million coins have already been minted.
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How would CBDC or the digital rupee slake their appetites? Digital rupee after all would be a digital variant of the fiat currency the INR.
In the event, the objective of defanging the monster cryptocurrency is not going to be achieved unless the Indian government makes cryptocurrencies out of bounds for its citizens and residents.
The straws in the wind however point to the contrary. The proposed 30 percent tax on gains from cryptocurrencies perhaps is a pointer to the shape of things to come. They would remain an investment option but would be put into the tax doghouse coming for a heavy-handed taxation. But that is not going to dampen the enthusiasm of bitcoin enthusiasts.
Government
If the government wants digital rupee to eliminate cash payments that are at once and convenient and anonymous, perhaps digital rupee could go a long way in that direction—unlike cryptocurrencies which maintain only wallet address, digital rupee accounts would bear the name, address as well as the PAN and Aadhaar numbers of the account holders from the contours of the stray, scanty and unwholesome literature available on the subject.
But aren’t we already headed in that direction with mobile wallets, debit and credit cards and BHIM?
It looks like CBDC has nothing much to offer except its novelty. Yes, blockchain technology is being talked about in the context of the digital rupee but isn’t a distributed ledger the hallmark of cryptocurrencies making for decentralization out of place in a milieu of fiat currency.
A fiat currency that is legal tender and is not a commodity or investment class can hardly posit itself as a counterweight to cryptocurrencies.
If the government hopes to wean away speculators from the unregulated cryptocurrencies which in addition have no underlying assets, it is backing the wrong horse. It should be set store by education in addition to levying stiff deterrent taxes.
— S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.
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