September 22, 2023

Digital central bank currencies are not an unmitigated blessing

RBI: Digital central bank currencies are not an unmitigated blessing

The Reserve Bank of India said in a report that digital central bank currencies are not all boons.

The Reserve Bank of India has made clear the potential benefits of digital central bank currencies (CBDCs), but in doing so it has pointed out some pitfalls.

The Reserve Bank of India (RBI) gave its assessment on CBDCs in a report on currency and finance on Sunday.

As part of the report, the RBI noted that several countries were working on their own sovereign national digital currency.

According to the central bank’s report, CBDCs can help promote financial inclusion and transparency of transactions. The RBI also said that national digital currencies Bitcoin Up could serve as an instrument of monetary transmission. They would help direct public consumption towards specific categories of products and services.

In explaining the benefits of CBDCs, the RBI also noted that digital counterparts to government fiat currency could be used by central banks to distribute „helicopter money“.

In its analysis, the RBI also raised concerns about the possible negative impact of CBDCs on the existing financial system. It said in this regard:

„CBDCs, however, are not an unmitigated blessing. They carry the risk of disintermediation of the banking system, especially when the commercial banking system is considered fragile.“

In countries with sizeable credit markets, CBDCs could take the place of commercial banks as the primary channel for transmitting monetary policy, according to the RBI.

As Cointelegraph previously reported, India is trying to follow China’s lead in developing its CBDC

According to RBI Governor Shaktikanta Das, the central bank is „doing very well“ in developing a digital rupee.

However, the RBI report did not provide details about the central bank’s digital rupee project. While the central bank also acknowledged in the report that internationalisation of the rupee was inevitable, it added that such a move would complicate the formulation and implementation of monetary policy.

With several countries looking to develop their own sovereign digital currencies, CBDC interoperability is something that concerns all stakeholders. Meanwhile, it was also reported that China’s digital yuan would be more domestically focused.