2 min read.Updated: 25 Mar 2021, 05:32 AM ISTLivemint
Comments by Nandan Nilekani underscore why we shouldn’t be bedazzled by cryptos. RBI must consider a digital currency. But let’s focus on UPI. And lift its bizarre market-share cap
In some form or another, cryptocurrency is here to stay, and grapple with it, we must. The latest to weigh in on the concept is Nandan Nilekani, non-executive chairman of Infosys and a vocal advocate of digital technologies being put to public use. Speaking at an event on Tuesday, he said most current cryptos could be useful as stores of value, like gold, but not for transactions. In India, as he elaborated, we already have digital payments done efficiently by our Unified Payments Interface (UPI), an advanced platform for bank transfers set up by the National Payments Corp of India (NPCI) that has caught on very well since it got going in 2016. It moves money around at virtually no cost compared to the energy-hogging shared-ledger system of cryptos. The latter could be drawn into the formal economy, he suggested, which would let us monitor the legality of their use. Nilekani also declared himself in favour of our central bank issuing its own digital rupee and recommended the deployment of UPI’s distribution architecture for it to reach out far and wide.
Indeed, we should not be bedazzled by cryptos. They use up staggering amounts of electric power, not just for their mining, but also for maintaining their sprawl of ledgers distributed across the internet for usage validation. Such blockchain operations offer transactional security, but at a very high cost. Recent estimates by researchers at University of Cambridge suggest that Bitcoin has turned voracious; it hogs over 120 terawatt-hours per year now, up sharply from 67 in October 2020. By the university’s Bitcoin Electricity Consumption Index, the machines that run it require more power annually than the Netherlands, a country of about 17 million people. Nevertheless, central banks around the world, ours included, are toying with the idea of digital currencies. The primary goal is to secure the primacy of their fiat money by outflanking cryptos. If done with ‘stablecoins’, subject to the same variable-supply regime as regular currencies, these e-tokens can play the very same role. They could foreseeably serve other purposes, too. China’s digital currency project, for example, seems aimed at global use for trade settlements. Moreover, an official digital token could grant its issuer tighter monetary control in a cashless economy of the future, especially in specific circumstances, such as when negative interest rates need to be imposed on savers in a scenario of negligible inflation. Sans cash, people would have to accept whatever terms their central bank offers on digital deposits held directly with it (or other banks). We would have to crush inflation and outlaw paper cash, however, for this to work in India. And there is also another worry. If we could all hold digital accounts (or wallets) at the Reserve Bank of India (RBI) for our day-to-day dealings, we would no longer need other banks to park our money. As money kept with RBI will be fully safe, this option would threaten deposit-dependent banks, which will have to offer us a big risk premium on interest rates.
Clearly, RBI cannot launch a digital currency without an indepth cost-benefit analysis. Yet, it would be best to create one, just in case our economy evolves to gain from it. For now, we should promote UPI usage. And for this, NPCI must abandon its bizarre 30% cap on any UPI-based app’s transaction volumes as a share of the market’s total. No commercial app can be expected to curtail its business, let alone hit a target defined in relation to what its rivals do