Digital currency can transform payment transactions; poses disintermediation risk: RBI report

Central Bank Digital Currency (CBDC) has the potential to bring about a sea change in payment transactions and quicken transmission, says a report released by the Reserve Bank of India (RBI).

However, the virtual currency poses a risk of disintermediation of the banking system, the Report on Currency and Finance (RCF) for the year 2020-21 released on Friday said.

The central bank said the findings of the report do not represent its view.

"CBDC, once introduced, can bring about a sea change in payment transactions, quickening transmission," it said, adding that this could be of greater relevance with the eventual decline in the usage of (physical) currency gaining traction.

"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," as per the report.

The public can convert their CASA deposits with banks into CBDC, thereby raising the cost of bank-based financial intermediation with implications for growth and financial stability, it said.

Further, the report said in countries with significant credit markets, commercial banks may lose their primacy as the major conduit of monetary policy transmission.

A proposed solution to limit disintermediation is to introduce a two-tier remuneration system for CBDCs, whereby transaction balances held by an individual remain interest free and are subject to a ceiling while CBDC balances of the individual over and above the ceiling are subject to a penal negative interest rate, it said.

It could be noted that the RBI Governor Shaktikanta Das on Thursday said a lot of work is going on internally in the RBI on CBDC and some broad guidelines and approach papers will be released on it soon.

The report said it is imperative for the RBI to monitor global developments, explore the possibility of the need for introduction of CBDC and remain in readiness to operationalise CBDC, as and when necessary.

It said the attractiveness of CBDC stems from its digital feature as well as from being a sovereign liability.

"CBDC can be designed to promote non-anonymity at the individual level, monitor transactions, promote financial inclusion by direct benefit fiscal transfer, pumping central bank 'helicopter money' and even direct public consumption to a select basket of goods and services to increase aggregate demand and social welfare," the report said adding it can acting as a direct instrument of monetary transmission.

Besides, an interest-bearing CBDC can increase the economy's response to changes in the policy rate, it said.