After seeing a situation in which the growth of private currencies posed a risk to investors, systems, and the economy, the Reserve Bank of India determined that the best way to deal with it was to create a digital currency, according to Deputy Governor T. Rabi Sankar.
His remarks come two days after the central bank began a retail CBDC pilot programme (central bank digital currency).
“We observed a developing atmosphere for private currencies.” We recognised that this is dangerous to investors, systems, and the economy. We also realised that private currencies have demonstrated that digitalizing cash might potentially benefit,” Sankar said at an event hosted by the Indian Banks Association.
The solution was to give a digital money. If a private cryptocurrency can accomplish anything, we should be able to build a product that can do it without the dangers in a safer format in fiat money guaranteed by the government and issued by the central bank. “This is basically what we’re doing with the CBDC tests,” he explained.
On the margins of the event, Sankar told reporters that the National Payments Corporation of India’s decision on Friday to extend its volume cap deadline for third-party application providers by two years came at a time when executing the originally planned date may have produced friction.
“We’ve seen it (the NPCI verdict), and it’s OK.” We’ll have to wait for competition to emerge since it takes time. And, at this point, doing it would very certainly have caused some friction in UPI,” he explained.
The volume cap date, which has now been postponed to December 31, 2024, was intended to reduce the risk of concentration in the system and perhaps limit the dominance of two huge companies while allowing other firms to flourish.
According to the most recent NPCI data, PhonePe completed over 47.26 percent of UPI transactions in October. Google Pay handled around 34% of transactions using UPI. Both of these firms have a combined market share of more than 81 percent of total UPI transactions.
According to industry analysts, the rise in market share of these two competitors implies consumer desire and convenience, which drives volumes for these digital payments organisations. The NPCI was counting on businesses like WhatsApp, Paytm, Tata Neu, and a few others to scale up significantly, but they have yet to do so.
The RBI’s earliest CBDC pilot projects, according to Sankar, are geared at ensuring the efficacy of all systems.
“”As time passes, the pilots should focus on determining the optimal technology and architecture for digital currency distribution,” he said.
These are the fundamental infrastructure challenges that will be addressed. “We’re giving them options and building infrastructure,” he remarked. On November 1, the RBI also established a wholesale CBDC pilot for trading in government bonds.
Sankar stated that the RBI would expand its digital infrastructure and that in the future, there might be useful in several ways, tokenized bonds, and other possibilities. According to the central banker, if it is believed that digitising the currency would solve the difficulties of the economy of payments systems, the RBI will support the process.
“Some potential game-changing solutions are available, particularly in cross-border transactions.” “The CBDC can solve various inefficiencies in this process,” he continued.
Sankar further stated that, while the wholesale CBDC pilot is now confined to government bonds, new use cases, including money market instruments, would be introduced in the future. According to Sankar, the next stage in the wholesale pilot would be to test the CBDC utilising blockchain.
Sankar emphasised the critical need of banks remaining vigilant to emerging technology, pointing out that lenders were sluggish to adapt to the evolution of the UPI.
“”How did a system of interactions between different bank accounts expand to the point where non-banks now account for the vast bulk of business?” “Banks clearly made a mistake here,” he continued.
“Perhaps the idea was that these insignificant value transactions were too small a bill to invest money and effort in developing the necessary technology and internal ecosystem,” he explained.
He saw that when innovative technologies emerge, they initially influence just a tiny percentage of enterprises. Scaling up from tiny beginnings and then experimenting and creating, he claims, is just “one short step” away. “If you don’t take the initial step, you’ll miss the train,” he explained.