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India has surprised the payments world by announcing that its central bank will issue a digital currency as early as 2022-23, a crucial decision that most major economies are refusing to make in a hurry. According to finance minister Nirmala Sitharaman, an electronic representation of India’s legal tender will boost its digital economy. How valid is that claim, and how risky is a hasty transition to a central bank digital currency? A digital rupee will be like banknotes, minus ATMs. Users will be able to transfer purchasing power from deposit accounts into smartphone wallets in the form of online tokens, which like cash will be a liability of the Reserve Bank of India.

Retail access to the central bank’s IOUs may not be a big deal in countries with well-capitalized financial systems. But this is a major benefit in India. As researcher Bhargavi Zaveri observes, depositors at 21 Indian lenders have been restricted from withdrawing their funds due to bank distress in the last few years: “A CBDC... will mitigate the risk of losses that Indian depositors face when dealing with commercial banks."

Consumers may find an e-rupee to be a safer alternative to bank deposits, which underpin 76 trillion in annual real-time payments via apps like Walmart’s PhonePe, Alphabet’s Google Pay and the homegrown Paytm. But therein lies the risk as well. If e-cash becomes popular and RBI places no limit on the amount that can be stored in mobile wallets, weaker banks may struggle to retain low-cost deposits. And even as they lose that cushion, lenders may be reluctant to shed their loan assets and sacrifice profits. Their less-liquid balance sheets could leave them vulnerable to bank runs.

All economies are mindful of this threat to financial stability. Yet, advanced nations also worry about the dwindling use of banknotes, especially after covid. As purchases go online, the basis of trust in demand deposits, that they convert to cash at face value, may get reduced to a theoretical construct. An e-currency could keep the notion of convertibility grounded in daily reality.

In India, though, there’s no such urgency because cash is far from dying. Banknotes account for about 15% of money supply, compared with 1% in Sweden. Yet, Riksbank is in no hurry to embrace a CBDC. After five years of weighing options, the Swedish monetary authority is still to take a final decision on whether to issue an e-krona.

The US Fed is seeking the public’s views on whether to provide an official tender to compete against private stablecoins riding on the dollar as the world’s most popular unit of account. A digital euro is in a 24-month investigation. If all goes well, the European Central Bank may offer it by 2025. Japan may delay a call to 2026.

India’s rushed deadline seems to be at least partly a response to cryptocurrencies, though it’s hard to see how an e-rupee can wean the public off the get-rich-quick lure of a speculative asset class. Another reason for hurry may be a desire to head off China, which by early November had some 140 million individuals signed up for its e-CNY. But China has no national roll-out date, and Alipay and WeChat Pay retain their stranglehold on digital payments. Besides, Beijing’s intention to promote a rival to the dollar in cross-border trade and finance will only become clear after the digital yuan makes its appearance in Hong Kong.

Any role for a digital rupee in India’s fast-growing online economy is fuzzy. Unlike perfectly anonymous cash, most CBDCs will be designed so central banks will be able to trace spending. However, transactions conducted with them may not be visible to payment apps, and fintech firms may lose access to some data being mined for cheap loans to those who don’t have collateral. As for gains, [it could eliminate the need of an] expensive network of correspondent banks to settle cross-border payments. For Indians working abroad, sending money home will become simpler and cheaper. This would mean savings for the world’s top recipient of remittances, though this could be achieved even without a digital rupee, via a global network like the Bank for International Settlements’ proposed Nexus project.

A digital rupee may well be a boon. For one thing, it may not be a bad idea for the monetary authority to use technology to put bank managements on notice: They need to stop taking depositors for granted. Still, that lesson is probably best administered after lenders have put the covid-related stress on their balance sheets behind them.

Besides, RBI must do its homework. The technology, blockchain or otherwise, will need to balance the often-conflicting goals of speed, scalability, auditability, security and privacy, something the Fed is trying to do as part of its Project Hamilton. Given India’s still-vast digital divide, a protocol for offline use has to be worked out. Rushing the implementation of what should ideally be a multi-year project may be fraught with unnecessary risks.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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