The RBI, however, has been working on the issue for some time and set up an internal working group in October 2020. There are different reasons why central banks are exploring the possibility of a digital currency. Some jurisdictions — for example, the US and Japan — are looking to reduce excessive dependence on cash. Others, like Sweden, where the usage of cash is dwindling, wish to provide a better option for electronic transactions. CBDCs are also expected to make cross-border transactions cheaper and more efficient. However, the biggest motivation seems to be the proliferation of so-called private virtual currencies, which could create risks for financial stability. Thus, central banks want to provide a viable alternative to protect monetary stability, which could also aid other objectives because of technology.
Several ways can be adopted to issue and manage digital currencies. The paper notes there are merits in issuing CBDC-wholesale and CBDC-retail. While the retail CBDC would enable safe payments, CBDC- wholesale could make settlements in the financial sector more efficient. Besides, there are different models of issuing a digital currency. In the direct model, for example, the central bank would be responsible for managing all aspects of it. This model is riskier. It would not only increase the burden on the central bank but also lead to financial disintermediation as funds move out of the banking system. In the indirect model, the central bank issues its digital currency through the banking and financial system like it does with cash. There is also a hybrid model. However, the note rightly argues that the indirect model will suit India better. Besides, like cash, the CBDC would be non-interest bearing.
Further, the CBDC can be token-based or account-based. A token-based digital currency would be a bearer instrument, like a banknote. In the account-based system, a record of the currency and transactions needs to be maintained. A big concern in adopting the CBDC would be privacy. While it is being argued that a token-based CBDC could be used for small retail transactions, it is likely that digital transactions would still leave some trail. There are a number of such issues that need to be addressed. One of the biggest challenges would be the use of technology. The RBI and other stakeholders would get to know more as the pilots are conducted. All things considered, the RBI would do well to move cautiously on this front. There is no real need to rush.
