The Real Need for CBDCs in India

The RBI announced that they were pushing back on incorporating the New Umbrella Entities .

In a separate headline, the RBI also announced that they will be focusing their energies on building?a working prototype for CBDCs and initiate the test phase by December this year.

The conspiracy theorist in me couldn’t help but tie the two together. And it got me thinking, “Do we really need CBDCs, and if so what problem would be solving for?”

As per the official release they’re trying to reach out to the millions who do not have an account and make it easier for them to transact digitally. Interesting. But, pray, remind me, what happened in 2014 when mobile wallets were picking up traction amongst the unbanked/underbanked? The RBI introduced regulations that made it difficult for them to operate, and effectively slowed down their growth. In fact there was even a reform that said if a person transfer money to their wallet from their bank account, the wallet cant hold it beyond 24 hours!

It was only after demonetization, that wallets were able to spread their wings and help the unbanked. UPI played its role in helping ?the underbanked. But not in terms of gaining access to more financial products.

However, there must have been a legitimate reason as to why RBI didn’t allow wallets to hold cash beyond a point of time ? The first reason was of course the loss of interest income. The next was that the regulators didn’t have transparency over the money trail and feared the money in wallets could be misused.

While both of them are valid concerns, the first one is that which effects consumers directly, the second being more of a regulatory/compliance concern. Now does the proposed CBDC solve for this? Since in its proposed form you may not require a bank account I’m going out on a limb to hypothize that the money in your CBDC wallet will not earn interest. On the second part, because the wallet is controlled by the regulatory body, they will have full transparency.

Now my aim is not really to alarm people, but rather raise a few uncomfortable questions and rationalize as to the reason behind it.

Now another use case that CBDC is said to solve for is that of ensuring that the policy benefits trickle down to the end users properly. But wasn’t that also the prime reason behind the launch of e?UPI ? BTW, I still don’t believe that the existing infrastructure available couldn’t have been used to solve for the issues highlighted in the launch of e?UPI but that’s?a separate discussion, which we can continue here.

Let's also discuss about Financial inclusion. As mentioned before, any one can recieve CBDCs, they do not need to have an account for it. Which is great, I think. But does availability of CBDC also result in the person being eligbile for other financial products? Not really, right ? Instead, here is where I feel the NUEs could've played a role. They could've built a more robust, interoperable payment infrastructure like UPI, with better success rates. And tied up with Account Aggregators, to ensure even the bottom of the pyramid have access to some, if not all, financial products they have the need for.

Another popular use case for CBDC, which has been discussed over the globe is that of instantaneous cross border payments. And with NPCI tying up with banks and financial institutes across the globe , this could’ve been one way to import a technological revolution from the heart of India to the rest of the world. While solving for cross border payments too.

Then there is this other very popular stance, that CBDC is to reduce the allure of cryptocurrency. This makes me laugh. CBDC, apart from possibly using blockchain technology, is completely antithetical to what cryptocurrencies offer!

So in effect, CBDC helps our regulators become like the big brother in China. And if that doesn’t make you uncomfortable it should. You may say you have nothing to hide, so why fear CBDCs. But imagine a future where your every spend is monitored and approved by the third eye. Already the regulators have said that with CBDCs they’ll earmark (again an old banking concept) funds for investing in various types of assets. And this out of the goodness of heart to get people financially literate and start saving for their futures! But what if the person setting ?the policy in the future isn’t that benevolent ?