Nothing in life is all positive. Chocolate? Comes with calories. Love? It’s fickle. Even newborn babies will fill you with gratitude, but will drain you of sleep. So it is with central bank digital currencies (CBDCs), which, depending on how you look at them, have outsized rewards, and also risks.
It’s no secret that a broad range of central banks are mulling, or are actively in the midst of issuing, CBDCs. And in a recent report by the Reserve Bank of India, “The Report on Currency and Finance 2020-2021,” there’s a lot to consider when it comes to CBDCs. A caveat: The report, stated the RBI, does not necessarily represent the bank’s view on the matter.
“Several countries have been toying with the idea of launching central bank digital currency (CBDC) in some form or the other,” noted the report. “The attractiveness of CBDC stems from its digital feature as well as from being a sovereign liability.”
And once they are actually issued, the RBI said, CBDCs can “bring about a sea change in payment transactions,” by “quickening transmission” in wholesale and retail transactions. The same CBDCs can foster financial inclusion, the bank stated, with the ability to facilitate direct benefit transfers. CBDCs may indeed become more important as physical cash use wanes. India embraced demonetization a few years ago, in an effort to root out black-market transactions and improve tax collections.
The bank pointed to the ongoing efforts by Facebook (and others) to launch Libra (more recently rebranded as Diem). Then there are the People’s Bank of China’s efforts to bring its digital yuan to market quickly – which, in turn, has spurred central banks across the globe to come to market with their own digital fiat.
Caution Warranted
But caution may be warranted, the report stated.
“CBDC is, however, not an unmixed blessing – it poses a risk of disintermediation of the banking system,” the RBI noted. In other words, issuing CBDCs may shift some of the foundations that central banking is founded upon. The RBI stated that individuals and institutions would be able to convert various holdings with banks into CBDC, “thereby raising the cost of bank-based financial intermediation with implications for growth and financial stability.”
Against that backdrop, said the RBI, in countries marked by large credit markets, commercial banks may “lose their primacy as the major conduit of monetary policy transmission.” Elsewhere, “providing anonymity may also have implications for cross-border payments in violation of extant acts; appropriate safeguards against AML/CFT would need to be laid down,” said the findings.
The RBI cited one way to mitigate this risk: introducing a two-tiered “remuneration system for CBDCs.” Under that system, CBDC transaction balances held by an individual up to a certain “ceiling” remain interest-free; amounts over that ceiling are subject to penal, negative interest rates.
Caution Elsewhere
Caution is popping up elsewhere, too.
As CoinDesk reports, Bank of Korea Governor Lee Ju-yeol “isn’t bullish on bitcoin, but he sees potential in a central bank digital currency (CBDC), if it’s done right.” Lee has said, according to the site, that it is better to do CBDCs “right than do it fast.” With respect to cryptos, he said in addressing an assembly this week that “it is difficult to understand why the price of bitcoin is so expensive. U.S. Treasury Secretary [Janet] Yellen also warned against cryptocurrency investment.”
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