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Stablecoin threat creates CBDC’s need: RBI dy guv

MUMBAI: Reserve Bank of India ( RBI) deputy governor T Rabi Sankar has said that stablecoins — cryptocurrencies pegged to stable assets like dollar or gold — are a bigger threat than crypto as it increases the risk of dollarisation. Until two years ago the RBI, like most central banks, was in a wait-and-watch mode with respect to central bank digital currency (CBDC), but things changed with the advent of stablecoins.
Dollarisation in economics refers to the domination of the US currency in the internal economy of a country or the alignment of a country’s currency with the US dollar.
Rabi Sankar said that earlier the thinking was that there was nothing much a CBDC could achieve that digital money could not. However, now there was no question of whether to go for digital currency, but on how to go about implementing it. The deputy governor was speaking at a webinar on CBDC organised by ICRIER.
Highlighting the issues around the introduction of CBDC, Rabi Sankar that the most significant advantage that it could provide was in financial payments. “The current model of correspondent banking gives scope for improvement in cost and time efficiency. This requires that CBDCs are available not just in one country but in other countries as well and there must be CBDC systems that talk to one another. Whether that happens through bilateral arrangements — only time will tell,” said Rabi Sankar.
He said that with digital currencies, rupee and dollar transactions can take place in the middle of the night. Incidentally, most of the correspondent banks are Western multinationals that play a major role in implementing sanctions. The deputy governor said that the chances of crypto being used for small-value payments are low. “Stablecoins are a much bigger threat in terms of dollarisation than in terms of crypto being used for small value or other transactions. Tesla initially said it will accept crypto but withdrew. One of the reasons is extreme volatility,” said Rabi Sankar. He added that stable coins, because they are linked to other assets or currency, can perform the functions of the currency.
“From the point of view of dollarisation, stable currency is something that we will have to deal with far more seriously,” he said.
Explaining the other use cases for CBDC, Rabi Sankar said that currency in circulation has risen from Rs 17 lakh crore at the time of demonetisation to over Rs 30 lakh crore. If part of the currency went digital, it would reduce costs and improve distribution efficiencies. The other motivation was that it would reduce the need for having large amounts of liquidity in the financial system to avoid settlement risks, he said.
The other risk would be that CBDC could impact the demand for deposits in the banking system and impact banks’ ability to raise deposits and create credit in the banking system, thereby increasing the cost of deposits. “Almost all central banks and we are no exception — will probably go in a calibrated and careful nuanced manner. The learning does not come from global experience, but from your own,” said Rabi Sankar.




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