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The author is a practising chartered accountant and an independent director on many large public companies whose views and ideas have been instrumental in framing policyMore From The Author >>
RBI CBDC – An Opportunity For The Future
RBI has recently launched a pilot for its digital rupee – a first step towards CBDC. However, there is a way to go before a full acceptance and leveraging of the blockchain ecosystem is achieved. This is a once in a generation opportunity for India to be a world leader, and the question is whether the RBI will spur innovation or, as with fintech, wait for an inescapable inevitability while the sector lags
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Blockchain will change the way the world works. It has applications across the spectrum – decentralisation, provenance, transparency, and security are all features key to processes across a wide array of business domains. The domain it will most emphatically impact though, is financial. It will precipitate reimagination of money in a way as, or probably more, profound as how dematerialisation did when Western Union invented wire transfers, or when credit cards changed how we pay.
The proliferation of cryptocurrency has demonstrated the ease and swiftness with which this will happen. However, the speculative nature and closed access to mining (techies and highly resourceful entities) has created substantive – and apt – pushback. From a money perspective only, stablecoins present the most viable pathway. Yet a mix of a complete deregulation approach – way beyond the avowed aim of decentralization ‐ and an absolutist outlook of the technological innovators in the domain have caused events such as the recent collapse of an ‘algorithmic’ stablecoin causing potential doubts in the minds of the public at large. The core issue here being a lack of underlying security or a guarantee by way of a ‘fiat’ as present in the case of the money we use today. Arguments can range from questioning the logic behind valuing gold (which used to be the underlying security for money) to questioning the stability and/or intentions of the government that issue fiats, but the real issue is the lack of structured regulation. Even the implementation of democratic processes – the most decentralized of all – has been fraught with inefficiencies (and worse). So to imagine that a completely free and fair system would operate decentralized currencies is a false notion no matter how deep one’s belief in it.
It is in this scenario that the introduction of Central Bank Digital Currency or CBDC has come into focus. These instruments, ideally, bring all the benefits of blockchain and decentralisation, while eliminating the risk of the absence of underlying security. A well administered CBDC not only digitises money with complete security and traceability, but also helps eliminate black money almost entirely from the system. It can also help governments reach unbanked segments effectively with a robust self sustaining system ‐ giving access to not just savings products, but also to credit by bringing all their transactions online.
What the above context does is highlight within it the key reason as to why governments might push back entirely or go glacially slow on the adoption of CBDC – the instant and almost entire elimination of black money. We have seen ingenious arguments about anonymity in blockchain ‐ but in a permissioned system like a CBDC this does not exist per se. What is even more important to note that by simply insisting on a permissioned system for any blockchain based products – cryptocurrency, NFT, stablecoins or anything for that matter – the whole anonymity factor is completely eliminated via introduction of KYC. A government and/or regulator with positive intent would simply deploy digital KYC and do away with all (reasonable) arguments against the blockchain ecosystem. You would still have absolutists argue against the involvement of regulatory entities but a pragmatic approach requires a stable system as an outcome of any innovation or initiative.
RBI recently introduced what it calls the e-rupee for wholesale transactions on a pilot basis. A lot has already been written about the mechanics and initial traction around this so we will not delve into it again here to avoid repetition for the reader. While this is a welcome move towards the leveraging of blockchain and creating more robust money and a much-improved financial infrastructure, it is a far too slow and limited movement. India has in the past seen itself being left behind on the fintech revolution for precisely the same reasons we are seeing now. We need to be ahead of the curve in the finance space the same way the Honorable PM has promised in the telecom space by committing that India will lead the world in 6G rollout. We have the very best financial and technical minds in India (or from India), but they are unfortunately driving innovation for foreign companies and governments, and even where it is for themselves they are being pushed to foreign shores.
In the coming years currencies will move to blockchain and will be decentralised. Cryptocurrency, stablecoins and NFT (in the form of tokenised tradeable assets) will be freely traded globally. The unfortunate situation caused by the pandemic in the past two years had the pleasantly surprising consequence of putting India way ahead of the world on the fintech front. This was not because the government or the regulator drove innovation – but that the regulator had to give up it’s unjustified & bureaucratic resistance to innovation. To the government’s credit, on account of the Honorable PM’s focus on digital & innovation, it provided and maximized impetus to this. It is time the government pushed it’s reluctant regulator to overcome its inherent inertial and let India take pole position.
The RBI pilot of the wholesale version of e-rupee is an absolute positive step and must be praised. However much more needs to be done ‐ the blind opposition to cryptocurrency, penalisation of digital assets and overall negativity towards decentralisation – all need to be cast away, and not gradually. Blockchain will be the next revolution and India has the wherewithal to be the undisputed leader in the world. Claiming this will not only bring prestige but will also drive growth and generate massive wealth and value. We owe it to ourselves and our country to use this opportunity to recoup the past losses from foregone opportunities.