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Why is RBI against introduction of private cryptocurrencies in India?

RBI Deputy Governor T Rabi Shankar suggest that private crypto assets will have no purpose once CBDC is introduced in the economy.

“Most cryptocurrencies have an equilibrium value of exactly zero, but they are still priced, sometimes, at fantastical levels,” read a statement by the Reserve Bank of India (RBI) Deputy Governor T Rabi Shankar. The statement was part of Shankar’s keynote address at an event organised by the International Monetary Fund (IMF).

Why it matters: The RBI has been one of the most staunch opponents of cryptocurrencies in India and its opinion carries a lot of heft within the ministry of finance which is currently deliberating upon how to regulate crypto assets.

What was the event about: The session titled “At the Frontier: India’s Digital Payment System and Beyond” was held to understand the rapid expansion of digital payments in India and how the growth was facilitated by a digital infrastructure and a supportive policy environment.

What is likely to be the role of CBDC: Shankar said that the RBI believes that Central Bank Digital Currencies (CBDC) would be able to “kill whatever little case there could be for private cryptocurrencies”.

  • “The RBI has been working methodically to introduce a digital version of the fiat rupee,” Shankar said, adding that the RBI considers there are three advantages.
    • Better currency management,
    • Reducing settlement risk in the system, especially the interbank system
    • Cross-border payments.
  • “However, since there is hardly any international experience to learn from and since CBDCs can have a significant impact on the banking system in terms of bank’s ability to mobilise deposits as well as (its) impact on monetary policy transmission, we would take a measured and graduated approach to introduction of CBDCs. We will go through the process of proofs of concept, then pilots and then a stage-wise introduction,” Shankar informed the virtual gathering.

What are some of the use cases of crypto assets: Crypto enthusiasts have touted many use cases that could make cryptocurrencies a mainstay of the financial system. Here are some of them:

  • Efficient cross-border payments: Cryptocurrencies are decentralised in nature and carry minimal transaction costs, while offering robust privacy and security, according to BQPrime.
  • Not subject to government policy: Payments are often handled by private service providers, which leave them exposed to potential protectionist policies, and leave them susceptible to sanctions and even exclusion from payment system, according to a Bloomberg report. Crypto is a viable alternative.
  • Smart contracts: A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code, as per a definition provided by Investopedia. They are being developed currently and hold a lot of promise to streamline contracts between two parties, as per several reports.
  • Crypto are not akin to CBDC: The RBI Deputy Governor’s statement needs to be taken with a pinch of salt as CBDC cannot entirely repalce cryptocurrencies, according to an op-ed in The Hindu.  The author explained that CBDC by definition will be centralised and central banks will exclusively issue and control CBDCs. “So, for the CBDC to be in central control, solving the ‘double spending’ problem and being a crypto (not just a digital version of currency) seems impossible,” the author said.

What else did Shankar say in his address: He urged people to not fall prey to “hype that technology can create a currency”.

  • Shankar explained that a currency needs an issuer or intrinsic value. “Many cryptocurrencies, which are neither, are still being accepted at face value, not just by gullible investors, but also by expert policy makers or academicians,” he warned.
  • Shankar challenged the “unquestioned acceptance” of stablecoins and termed it as “puzzling”. Stablecoins are crypto assets pegged to a particular currency and derive their value from them.

Is there a case for private cryptocurrencies: Shankar argued that the case for private cryptocurrencies has not been made anywhere, especially the existence of multiple private cryptocurrencies.

Has RBI’s view on cryptocurrencies changed: Shankar reiterated the RBI’s stance on cryptocurrencies elaborating that the central bank believes that private currency should not be “permitted just because it is backed by high tech”.

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  • Shankar comments echo his longstanding position on cryptocurrenciees. He has previously stated that the advisable option for India would be to ban crptocurrencies.

What are the challenges faced by India’s digital payments sector: “ A large section of the population is still outside the digital domain, as many lack a smartphone or many are not comfortable with using digital payments,” Shankar highlighted. He added that there is a focused approach to develop products that can work offline or on feature phones or even in the absence of phones.

  • He also pointed out the existence of frauds in the digital payments arena. “While the extent of frauds is not concerning at this stage, I believe they are one of the lowest in terms of incidents in the world. In absolute terms, they are growing and they need our attention,” Shankar cautioned. “For instance, one in (every) 59,000 transactions was fraudulent (in FY21). It has gone up to one in 30,000 in 2021-22. So not alarming, but something that we need to plug right at this stage,” he suggested.
  • Shankar also said that it is important to ensure that the data received in fiduciary capacity is used only for the intended purpose. “This is probably the bugbear of the entire technology growth that we are seeing in all aspects of our lives,” he said. He stressed that one needs to be mindful of the use of data and its consequences for privacy and safety of the individual and businesses.

Will banks disappear eventually: Shankar said that technology was a tool. He added that technology can change the way banking and financial services can be delivered fundamentally but there will always be a need for a bank to provide liquidity services to an economy.

  • A bank intermediates between savers and borrowers, and bridges two types of gaps— spatial and temporal.
  • “It’s important to understand that technology can bridge the spatial gap but technology is not as good as bridging the temporal gap. So the concept that banks can be replaced is somewhat misplaced, or probably lies in the distant future,” Shankar concluded.

Also read:

Written By

I cover several beats such as Crypto, Telecom, and OTT at MediaNama. I can be found loitering at my local theatre when I am off work consuming movies by the dozen.

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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