Why India is dabbling with a digital currency

The world has come a long way from the days of bartering goods to issuing official currencies while also moving from just coins to paper. Mobile payments and virtual currencies like bitcoin further transformed the market. But it appears that money will keep changing form, given that while governments are wary of cryptocurrencies, they seem to like digital currencies backed by their respective central banks. These are Central Bank Digital Currencies, or CBDCs essentially tokens issued on a blockchain to represent a country’s national or fiat currency.

     

While it may sound like a new idea, the Bank of Finland launched the Avant smart card, an electronic form of cash, in 1993. It was discontinued in the early 2000s, but some consider it the world’s first CBDC. Regardless, unlike crypto assets, CBDCs are more secure and inherently not volatile. Further, like all virtual currencies, they are relatively cheaper to produce since one also has to account for computing costs.

Money comes at a cost On the other hand, printing paper money and coins are much more expensive. According to the information given by the Currency Note Press (a unit of Security Printing and Minting Corporation of India Ltd) to a Right to Information filed by Business Line, the standard cost of printing one currency note in the denomination of ₹50 was ₹1.24 in 2018-19, which came down to ₹1.22 in 2019-20. Similarly, the cost of printing one ₹500 note dropped to ₹2.65 from ₹2.71. The cost of printing each unit of ₹200 in 2018-19 was ₹2.48.

The total expenditure incurred on security printing from 1 April 2021 to 31 March 2022 was ₹4,984.80 crore as against ₹4,012.10 crore in the previous year (1 July 2020 to 31 March 2021). This cost, which does not include the Environmental, Social, and Governance (ESG) cost of printing money, is predominantly borne by four stakeholders -- the public, businesses, banks, and the central bank. Globally, the 2022 currency operating budget of the US Federal System is $1.06 billion to cover the production costs of currency and coins.

Enter CBDC The use of CBDCs can help in reducing these costs. The 2021 Bank for International Settlements (BIS) survey on CBDCs conducted on 81 central banks reveals that 90% of central banks are engaged in some form of CBDC work, and more than half are now developing them or running concrete experiments. There were a little over 100 CBDCs in research or development stages by July 2022, according to cbdctracker.org.

Some CBDCs are fully operational such as the Bahamian sand dollar that made its debut in October 2020, the eNaira in Nigeria unveiled in October 2021, and Jamaica’s JAM-DEX launched recently. Currently, 17 other countries, including major economies like China and South Korea, are in the pilot stage and preparing for possible launches. China was the first large economy to pilot a CBDC in April 2020, and it aims for widespread domestic use of the e-CNY by 2023.

India is preparing to launch its own CBDC, and there’s much thought going into the task. Last week, the Reserve Bank of India published a concept note on how it proposes introducing CBDCs in the country. It’s a 51-page report but worth reading.

According to the Reserve Bank of India (RBI), the e₹ (digital rupee) will not be substantially different from banknotes but being digital, “it is likely to be easier, faster and cheaper” while sharing all the transactional benefits of other forms of digital money.

Courtesy: Livemint.com

RBI broadly defines CBDC as the legal tender issued by a central bank in a digital form. Two basic considerations govern its approach. The first is to create a digital rupee that is as close as possible to a paper currency, and the second is to seamlessly manage the process of introducing the digital rupee. Retail CBDC would be available for use by the private sector, non-financial consumers, and businesses, while wholesale CBDC is designed for restricted access to select financial institutions. CBDC could also be token- or account-based.

While an account-based CBDC will allow an intermediary to verify the identity of an account holder, a token-based CBDC will enable people receiving the token to verify that their ownership of the token is genuine. The tech, too, could either involve using infrastructure on a conventional centrally controlled database or a distributed ledger technology (DLT) such as blockchains.

Pros and Cons RBI argues that CBDC could provide the public with risk-free virtual currency that will provide them legitimate benefits without the risks of dealing in private virtual currencies. Moreover, CBDCs can also be programmed. For instance, agriculture credit by banks can be programmed to ensure that it is used only at input store outlets.

That said, some challenges need to be addressed. CBDC risks include digital fraud, data breaches, lack of privacy, and the gap in digital inclusion. For instance, not all Indians can use CBDCs since many still do not have internet connectivity. Therefore, RBI has suggested that offline capabilities must be incorporated in CBDC before rolling it out, similar to what the Bank of Japan (BoJ) is exploring with a digital yen. One solution includes using a chip (integrated circuit or IC) on a SIM card but with a feature phone rather than a smartphone. Visa16 has also proposed an Offline Payment System (OPS) using Bluetooth and Near Field Communication (NFC).

Further, interoperability between networks will become important, especially for cross-border CBDC transactions. RBI has underscored that security risks would also need to be mitigated through policy calls like putting caps, enhanced risk management and governance framework and rigorous testing of functionalities through a pilot before rolling out the CBDCs for the public. Given that the CBDC will generate humungous amounts of data in real-time, RBI suggests in the paper that the analytics of Big Data generated from the CBDC can assist in evidence-based policymaking after factoring in anonymity to protect the privacy of transactions.

RBI has also advised against vendor lock-ins and suggests that if proprietary systems are used, there should be enabling clauses to allow complete ownership. Further, RBI suggests that CBDCs should be based on algorithm-driven processes rather than mining (like cryptocurrencies) to make them energy-efficient and environment-friendly.

RBI cautioned that CBDCs might “hypothetically result in faster bank runs” and “financial disintermediation could lead banks to rely on more expensive and less stable sources of funding”, both of which can be addressed through appropriate limits on CBDC holdings and transactions. CBDC will also require a legal framework that clarifies whether the central bank has the mandate to issue CBDC and what status it would have legally, notes the RBI paper. You may also read my colleague’s explainer on this topic.

Given these concerns, RBI has suggested conducting large-scale pilots with a diverse and larger user base and incorporating the learnings into the final design of the CBDC. It’s a step in the right direction.

(The correct answer is given below)

CUTTING EDGE

Robots in the workplace contribute to burnout, job insecurity

Working alongside robots could contribute to job burnout and workplace incivility, but self-affirmation techniques could help alleviate fears about being replaced by these machines, according to research published by the American Psychological Association. Researchers found that workers in the US and parts of Asia feel job insecurity from robots, even in industries where robots aren’t being used, and those fears may not be justified, said lead researcher Kai Chi Yam, an associate professor of management at the National University of Singapore.

“Some economists theorize that robots are more likely to take over blue-collar jobs faster than white-collar jobs,” Yam said. “However, it doesn’t look like robots are taking over that many jobs yet, at least not in the US, so a lot of these fears are rather subjective.” The researchers conducted experiments and analyzed data from participants in the U.S., Singapore, India and Taiwan. The study was published online in the Journal of Applied Psychology.

US’ AI Bill of Rights needs more teeth

The US government’s proposal for an AI Bill of Rights is a positive step toward protecting people in the era of AI since the new guidelines name and address “the diverse harms people experience from other AI-enabled technologies, like emotion recognition,” says Access Now’s US policy analyst Willmary Escoto, adding it “could have a monumental impact on fundamental civil liberties for Black and Latino people across the nation.” A Wired article, however, argues that the policy is “toothless” against big tech companies and that “the draft’s tenets include allowing citizens to opt-out of algorithmic decisionmaking, which could reshape federal government—but not the private sector”. Even an article in the Lawfare Institute argues that the AI Bill of Rights is “focused primarily on AI’s proliferation in human services, including hiring, education, health care provisioning, financial services access, commercial surveillance, and more” and gives less weightage to other uses of AI such as in critical infrastructure, most consumer products, and online information ecosystems.

The answer to the Quiz:

d) Beeple’s Everydays: The First 5000 Days sold for a whopping $69.3 million. However, the opening bid on 25 February 2021 for the NFT (a token that exists on a blockchain that cannot be replicated) was a mere $100. Christie’s website saw 22 million visitors tune in during the final minutes of the sale.

Courtesy: livemint.com

The origins of this artist Beeple’s work date back to 1 May 2007. Beeple, also known as Mike Winkelmann, had then set out to create and publish online a new artwork every day.

I hope you folks have a great weekend. And do remember, we welcome your feedback.