The various prerequisites for an eventual move towards a cashless economy are gradually falling into place. India already has a new digital platform for mobile payments that is perhaps one of the best in the world. A new report by the Boston Consulting Group estimates that digital payments in India would touch $500 billion by 2020. Rajan Anandan, Google’s vice-president for South-east Asia and India, told this newspaper on Tuesday that the Indian digital payments industry is at an inflection point. Few would remember that the Reserve Bank of India (RBI) had begun taking a serious look at the future way back in 2003, when a working group on the use of electronic money submitted its report. The central bank later seemed to have grown wary of new digital currencies such as bitcoin; it even issued formal warnings about the risks of using them. It has now decided to join the revolution through a joint committee with the finance ministry on cashless payments. Most of the current thinking is about using digital technology to make payments that still use the old monetary system. All the options—smart cards, mobile payments, electronic wallets—are merely an attempt to make rupee transactions digitally. But this is also a good time to ask a more radical question: Should RBI take the next step and issue its own digital currency using blockchain technology or some other form of consensus network? China seems to be already considering such a possibility. Its central bank governor said in February that China will move towards issuing a digital currency, though he was vague about the details about when the shift will take place, if at all. He did say that blockchain technology may not be able to handle the entire transaction needs of a large economy because the technology requires massive computational and data storage capabilities. The move to a digital currency issued by a central bank rather than a private sector entity can have profound effects on the financial system. In a recent note that deserves to be read in full because of its radical conclusions, Bank of England economist Marilyne Tolle has explained some of the consequences. She has focused on a few important issues. First, banks could lose their dominant position in the payments business if individuals have direct access to the central bank clearing house for a digital currency. Second, people directly holding base money with the central bank will undermine bank business models that are based on credit creation through the fractional reserve system. Third, the existing monetary policy consensus could be overturned as central banks shift back to directly targeting money supply rather than interest rates. These are still early days. Digital currencies still have a lot of issue, and the wild swings in bitcoin prices are not exactly a good advertisement as far as those who are bothered about monetary stability are concerner. These are teething problems in what could be a dramatic shift in the way the world transacts, if the technology needed for digital currencies keeps pace with demand from the new payments ecosystem. These are interesting times for monetary thinkers. RBI will have a new governor in a little more than a month. He will have a lot of immediate problems to deal with, from the recent rise in inflation to the capital outflows that are expected in September to establishing a working relationship with the government. These will obviously be his main tasks. However, he would also do well to position the Indian central bank at the cutting edge of thinking on digital currencies. Maybe he should ask his staff economists to begin work on figuring out whether RBI will be in a position to issue its proprietary digital currency within a decade. And whether the legacy banking system is in a position to adapt to the times. A bit of futurism would not be a bad idea at all. A few US economists have talked about a Fedcoin—or a Fed version of the bitcoin. Maybe it is time for a similar discussion on a Bharatcoin.
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