India’s central bank has recognized the potential benefits of central bank digital currencies but not without including a few pitfalls.
The Reserve Bank of India offered its assessment of CBDCs as part of its report on currency and finance issued on Feb. 28.
As part of the report, the RBI noted that several countries are exploring the creation of their own sovereign national digital currency.
According to the central bank’s report, CBDCs can help to promote financial inclusion and transactional transparency. The RBI also stated that national digital currencies could be useful as an instrument of monetary transmission by helping to engineer public consumption towards specific categories of products and services.
Detailing the benefits of CBDCs, the RBI also remarked that digital counterparts to sovereign fiat currency could be used by central banks to pump “helicopter money.”
In its analysis, the RBI also expressed concerns about the potential negative impacts of CBDCs on the legacy financial system, noting:
“CBDC is, however, not an unmixed blessing — it poses a risk of disintermediation of the banking system, more so if the commercial banking system is perceived to be fragile.”
For countries with significant credit markets, the RBI argued that CBDCs could threaten the primacy of commercial banks as the primary channel for the transmission of monetary policy.
As previously reported by Cointelegraph, India is looking to emulate China in creating its own CBDC. According to RBI governor Shaktikanta Das, the central bank is “very much in the game” of developing a digital rupee.
However, the RBI report did not include any details about the central bank’s digital rupee project. In another portion of the document, the central bank did concede that internationalization of the rupee was inevitable but added that such a move would complicate monetary policy formulation and implementation.
With several countries looking to create their own sovereign digital currencies, CBDC interoperability is becoming a concern among stakeholders. Meanwhile, reports indicate that China’s digital yuan will have a more domestic focus.
Ray Schuetz received a Masters Degree in computer science from The University of Texas (Austin). Ray has been working as a full-time blockchain consultant for the past 3 years. In his spare time, Ray enjoys writing for EthereumCryptocurrency.com and other crypto news publications.