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RBI Panel to Study Feasibility of Digital Currency

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This is the first time that the central bank is discussing its possible use in India. RBI has constituted an inter-departmental group to explore the feasibility of introducing a rupee-backed digital currency to battle rising costs of managing paper currency. This is RBI’s first take on the possible use of digital currency. “In India, an inter-departmental group has been constituted by RBI to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency,” the RBI report stated. “(Globally), the rising costs of managing fiat paper/metallic money, have led central banks …to explore the option of introducing fiat digital currencies”. For FY18, total cost of printing paper notes in India was Rs 636 crore, according to RTI response to India Today.
It cited rapid changes in the payments industry and emergence of private digital tokens as the possible factors. Digital currency, backed by an asset such as gold or fiat is known as stable coin –– whose value is not as volatile as cryptocurrencies like bitcoin or ethereum. “While the RBI is still wary of privately issued crypto currency, they seem to be open to the idea of leveraging distributed ledgers to transform our financial ecosystem…The idea of a central bank issued digital currency is very promising though issues around digital counterfeiting will need to be addressed,” said Mahesh Makhija, partner advisory, Financial Services, EY India.
RBI outlined the challenges faced due to cryptocurrencies in a 667-word block item. It said cryptocurrency currently does not “pose systemic risks” but its increasing popularity leading to price bubbles raises concerns for consumer and investor protection, and market integrity. However, RBI cautioned: “the cryptocurrency eco-system may affect the existing payment and settlement system which could, in turn, influence the transmission of monetary policy.” Currently, RBI has imposed a ban on regulated entities like banks and payment gateways in India to stop offering services to cryptocurrency-related businesses. This forced cryptocurrency exchanges to shut operations or move to peer-to-peer model (cash-based trading).
“Developments on this front need to be monitored as some trading may shift from exchanges to peer-to-peer mode, which may also involve increased usage of cash. Possibilities of migration of crypto exchange houses to dark pools/ cash and to offshore locations, thus raising concerns on Anti Money Laundering (AML)/ Combating the Financing of Terrorism and taxation issues, require close watch,” RBI said. Digital assets such as bitcoins are stored in “electronic wallets” that is prone to hacking and operational risks.
“There is no established framework for recourse to customer problems/ disputes resolution as payments by cryptocurrencies take place on a peer-to-peer basis without an authorised central agency which regulates such payments. There exists a high possibility of its usage for illicit activities, including tax avoidance,” it said. “A globally coordinated approach is necessary to prevent abuses and to strictly limit interconnections with regulated financial institutions,” the RBI said.

The Economic Times, 30th August 2018

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