Saw many threats from crypto; CBDC was the way forward: RBI DG Sankar

Implementing NPCI volume-cap right now may have caused friction in UPI

After observing an environment in which the evolution of private currencies posed a threat to investors, systems, and the economy, the Reserve Bank of India felt that the manner to deal with it was to provide a digital currency, Deputy Governor T. Rabi Sankar said.

His comments came two days after the central bank launched a pilot project for retail CBDC (central bank digital currency).

“We saw an environment where private currencies were evolving. We realised that this poses a threat to investors, systems, and the economy. We also realised that private currencies have shown that digitalising currency can possibly benefit,” Sankar said at an event organised by the Indian Bank’s Association.

“The way to deal with it was to provide a digital currency. If there is anything that a private cryptocurrency can do, we should be able to create a product that will do that without the associated risks in a safer format in fiat money backed by the government and issued by the central bank. This is essentially what we are doing in the CBDC experiments.” he said.

Sankar said to reporters at the sidelines of the event that the National Payments Corporation of India’s decision on Friday to extend the volume cap deadline for third-party application providers by two years had come at a time when implementing the previously envisaged deadline may have caused friction.

“We have seen it (the NPCI’s decision), it is fine. Competition takes time to evolve, we’ll have to wait for it to evolve. And at this stage of time, probably implementing that, would have cost some sort of friction in UPI,” he said.

The volume cap deadline which has now been pushed to December 31, 2024, was aimed at reducing the risk of concentration in the system and potentially curbing the dominance of two large players while ensuring other players also get a chance to grow.

According to the latest data released by NPCI, PhonePe processed over 47.26 per cent of the transactions done through UPI in October. Google Pay processed about 34 per cent of transactions through the UPI. Both these players have a combined market share of over 81 per cent in volume terms of total transactions processed on UPI.

The growth in the market share of these two players, however, indicates customer preference and convenience; driving volumes for these digital payments firms, industry experts said. The NPCI was banking on players, such as WhatsApp, Paytm, Tata Neu, and a few others, to scale up substantially but so far, they have not managed to do so.

According to Sankar, the RBI’s initial CBDC pilot projects are aimed at ensuring the efficacy of all systems.

“As we go along, the pilots will focus on identifying the right technology on the right architecture for distribution of digital currency,” he said.

“These are the basic infrastructural issues that we will address. We are providing a choice to people, and we are creating infrastructure,” he said. The RBI also launched a wholesale CBDC pilot for trading in government bonds on November 1.

Sankar said that the RBI will build upon the digital infrastructure it is creating and that going ahead, there could be smart contracts, tokenized bonds, and several other possibilities. According to the central banker, if there was a view that the digitisation of the currency would resolve the problems of the economy of payments systems, the RBI would facilitate the process.

“There are potentially game-changing choices available, particularly in the area of cross-border transactions. There are a huge amount of inefficiencies in this process that the CBDC can take care of,” he said.

Sankar also said that while the wholesale CBDC pilot was currently limited to government bonds, more use cases would be included, including money market instruments. The next step in the wholesale pilot, according to Sankar, would probably be trying out the CBDC using blockchain.

Emphasising the crucial importance of banks staying alert to new technologies, Sankar pointed out that lenders had been slow to respond to the evolution of the UPI.

“How is it that a system of transactions between two bank accounts has evolved in a way where most of the business is owned by non-banks? Clearly, banks missed a step here,” he said.

“Probably, the feeling was that these small value transactions might be relatively too insignificant a bill to put your resources and effort into to develop the necessary technology and internal ecosystem,” he said.

He observed that when revolutionary technologies spring up, they initially affect small portions of businesses. Scaling up from the small beginnings and then improvising and innovating is just “one small step” away, he said. “You miss the first step, you miss the train,” he said.