CBDC poses more challenges than it solves
As we know, Central Bank Digital Currency (CBDC) is a hot topic of interest. The Indian government has announced its intention to introduce CBDC.
Globally, the CBDC idea came in response to the spectacular rise of Bitcoin as an alternative currency. Something was seen that was needed to be done. CBDC was deemed to have the form (if not the function) to take on Bitcoin. A large number of central banks are now engaged in policy research and pilots. It is another matter that the people who were attracted by Bitcoin are distrustful of governments’ proclivity to print notes, and CBDC will hardly entice them.
The question then arises is why CBDC? One answer came from China, which has taken steps to cut Big Tech companies to size, through the introduction of the Digital Yuan. Their CBDC also provides ready access to the rich and exhaustive data, useful for the ‘social credit’ approach, which builds surveillance-driven enforcement for ‘trustworthy’ behaviour. The credit system is closely related to China’s mass surveillance using facial recognition, big data analysis, and artificial intelligence.
Would we in India want to go that way? One would think not. Apart from the privacy risk involved, India has built Unified Payments Interface (UPI), an open-standard payment system, which is driving spectacular growth in digital payments. Robustness and high availability are being achieved through better technology and offline payment features. There may be a case for another system like UPI, just to avoid the monopoly risks such as low innovation, poor customer service and single point of failure. However, that does not require CBDC.
On the other hand, physical tender or cash is not going away. Cash in circulation to GDP ratio has risen steadily to 14.5% in 2020-21 from 8.7% in 2016-17. It is interesting to note that this ratio can range from 1.2% in Scandinavia, to 7.8% in China, to a high of 19% in Japan.
The electronic payments are unlikely to fully replace usage of cash. It is also neither feasible nor desirable, due to access issues. If that be the case, the fixed investments in note-printing infrastructure, including supply chain aspects like paper and ink, and lateral innovations like plastic notes, will always remain with us for foreseeable future. The comparison should therefore be only on marginal costs.
CBDC will also cost substantially to introduce and maintain, in terms of the capital and operating expenses for technology infrastructure at the issuing end, acquiring infrastructure by merchants and smartphones at the users’ end. It was, therefore, surprising to read the following in a Bank of International Settlements (BIS) publication: “India’s high currency-to-GDP ratio holds another motivation for introducing CBDC. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced.”
Confirmation bias leads to picking convenient data points, and can derail evidence-based decision making.