Currency is a way of exchange for goods and services. In a nutshell, it is money in the form of paper or coins. Government-issued currency is an allowed method for any form of payment. Many countries accept the US dollar as payment, others directly peg their currency value to the US dollar. Let’s take a deep dive into the insights shared by RBI’s Governor D Subbarao have in regard to Digital Currency, how it differs from cash, and much more.
What is Crypto?
A Crypto or Cryptocurrency is a form of virtual or digital currency, it is made up of computer algorithms. It stays online only in Digital form. There is no control of any country or government on this. Its records are maintained in a digital ledger.
In other words, A cryptocurrency is a virtual currency based on the blockchain; and decentralization secures the digital currency.
What is Stablecoin?
Stablecoins are cryptocurrencies but do not have volatility. Undoubtedly it has all the features of cryptocurrencies but does not fluctuate much in value. It is just like any traditional currency, such as the dollar or rupee.
What is Central Bank Digital Currency?
Whereas central bank digital currency (CBDC); is a virtual version of the country’s sovereign currency issued by the central bank. This is distinct from private-party-issued cryptocurrencies such as Bitcoin.
RBI’s Concern With Crypto
- Monetary Stability
- Financial Stability
- Capital flight
Monetary Stability:
RBI’s interest rate policies will have less impact if transactions shift to cryptos.
Financial Stability:
Banks exposed to crypto can suffer sudden huge losses.
Capital flight:
Cryptos could become a conduit for capital leakage.
RBI’s Governor Dr. D Subbarao on Cryptocurrency and CBDC
Since the Reserve Bank of India (RBI) preparing to launch a pilot project for its central bank digital currency (CBDC) in December former RBI Governor Dr. D Subbarao; believes it must not be an interest-bearing instrument, as this would pose an existential threat to the banking system.
“I don’t believe CBDCs should pay interest; because if they do, then they are not a currency since currencies don’t bear interest,” the former governor said.
An interesting take on CBDC
An interest-bearing CBDC will function as follows; the central bank allows citizens to open accounts. Government exchanges your hard cash with digital cash. Because the RBI will provide the deposit facility it may pay interest on it in the same way that commercial banks do now.
“If CBDC accounts with the central bank offer interest; again there will be an incentive for people to move their deposits in the banking system to CBDC accounts”; RBI’s Governor said.
Although Subbarao believes that a major concern about central bank digital currencies is that they may erode commercial banks’ intermediation functions. Yet, Our former governor believes; these concerns are unlikely to be realized cause; in the worst-case scenario, the RBI’s CBDC may not be of any interest to the holder.
In terms; of the impact that CBDCs may have on the money supply; Subbarao sees no reason to believe that people will be motivated to conduct more transactions simply; cause they have a digital version of hard cash.
Subbarao; who personally championed the RBI’s grassroots efforts for financial inclusion and financial literacy during his tenure as governor; argued that financial inclusion is much more than payments; and that a CBDC is unlikely to improve on existing payment options.
Source: CNBC
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