Just think of this situation. It is eight o’clock in the evening, and there is an announcement made that from here on, all rupee notes are being withdrawn and replaced with a digital currency called CBDR, short for Central Bank Digital Rupee. People need not panic and have a week’s time to visit a branch of the Reserve Bank of India (RBI) or any public sector bank and exchange all their currency for digital rupees. No questions will be asked. An account will be opened with RBI, and based on one’s Aadhaar card and PAN card details, the amount will be automatically transferred to it for access through a registered mobile phone. The transaction will take just a few minutes and one can step out of the branch with money loaded on one’s handset. Does this sound fantastic? It may sound as much, but this is a credible possibility.
The likelihood of such a scenario has been raised by active talk in
various countries, including India, of launching a central bank digital
currency (CBDC) that will make it easy for us to carry and use money. Some
left-wing economists would likely object, calling it Orwellian or Kafkaesque
and clearly dystopian. India has at least 500 million people with no access to
a smartphone (Statistica reports the use of 845 million phones in 2021). Large
numbers have neither an Aadhaar nor PAN card, or even if they do, are not in
the habit of using phones except for making calls. Many of our senior citizens
have already been swindled by online scamsters and would be in a spin with a
CBDR.
Right-wing progressive economists, however, would likely say that this
is the way to go and it is happening everywhere, and that we should adapt and
not shy away from technology. The elderly and poor must adapt to this new
system and it would be bad for them if they don’t.
We heard similar views during demonetization in 2016 and hence can
expect CBDR discussions dominated by the two arguments outlined above.
What exactly is a CBDC? When central banks convert paper currency into a
digital version, it would be called a CBDC. This will happen officially and
would not be driven by crypto maniacs or the more orderly e-wallets around, though
the concept is the same. Today, we swipe our phones to make payments through
various wallets, which can be private or UPI-based. Money is drawn from our
bank account or kept in these exogenous wallets. So, what really is the
difference?
The distinguishing factor is that the ₹30 trillion of currency that currently exists would
be consigned to the burner and will be transferred to our digital accounts. It
has to be managed by the central bank or else it would be the same as e-wallet
money, which have a cost attached by way of either a direct charge or loss of
interest on the balance kept with the facility. Clearly, RBI cannot insist that
a digital rupee has to be kept with banks or in e-wallets. In fact, RBI could
incentivize people to adopt it by paying about 1-2% interest.
The advantage of paper elimination for the government would be that
every rupee in the country could then be traced, in contrast with the currency
presently held by our population. This means that if we spend heavily and pay
by cash for a wedding party, say, then it can be tracked by tax authorities.
Even the cash gifts would have to be digital. The same would hold for cash paid
for property; real estate developers often still take cash as they have paid
cash to get clearances or for land. The system will hence get cleansed.
It would also be an intrusion of privacy, as every monetary action of
ours could be tracked by the taxman, be it frequent visits to a high-end
restaurant or beauty parlour. Problems will arise if the counter-party has no
account of a payment (like, say, a beggar). The judiciary would have to be consulted
on this, as it involves privacy issues.
If tracking transactions is not an aim, then what could be the larger
purpose? One disingenuous argument often given is that it will save on the cost
of printing currency. The annual cost of printing notes for RBI is around ₹4,400 crore, while its total income is around ₹1.5 trillion. Therefore, cost is not a factor.
Another argument put across is that it helps in government transfers to the
needy, as in the PM Kisan scheme, rural employment guarantee, etc. But the
government has already gotten around 440 million Jan Dhan accounts opened for
India’s needy, so a system already exists for such transfers. Do we need
another vehicle?
All outcomes have to be considered, even if one discounts the disruption
at the individual level. The first is that the entire financial system could go
into a spin. Payments banks will need to close down, as savers will have to
maintain accounts with RBI anyway. The UPI system would be redundant. Even
commercial banks will see people move money out of savings deposits and
probably opt for term deposits at higher rates. Regular accounts served as cash
anyway, though they often also have restrictions on withdrawals. It would make
sense to dispense with these accounts. ATMs will have to shut down, for sure,
and this industry will vanish along with its retinue of security guards and
companies that ferry cash.
The other major challenge for our central bank will be technology
disruptions. Hackers would be a threat. We still hear of technical failures at
banks, which close for maintenance on holidays.
Paper cash has always been the last resort for transactions. But what if
there is no paper cash?
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