Central Bank Digital Currency - Is This the Future of Money.
ENPNewswire-July 26, 2021--Central Bank Digital Currency - Is This the Future of Money
(C)2021 ENPublishing - http://www.enpublishing.co.uk
Release date- 23072021 - (Keynote address delivered by Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India - July 22, 2021 - at the webinar organised by the Vidhi Centre for Legal Policy, New Delhi).
Introduction
The idea of 'Central Bank Digital Currencies' (CBDC) is not a recent development. Some attribute the origins of CBDCs to Nobel laureate James Tobin2, an American economist, who in 1980s suggested that that Federal Reserve Banks in the United States could make available to the public a widely accessible 'medium with the convenience of deposits and the safety of currency.' It is only in the last decade, however, that the concept of digital currency has been widely discussed by central banks, economists & governments.
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Except as currency notes, all other use of paper in the modern financial system, be it as bonds, securities, transactions, communications, correspondences or messaging - has now been replaced by their corresponding digital and electronic versions. On anecdotal evidence, use of physical cash in transactions too has been on the decline in recent years, a trend further reinforced by the ongoing Covid19 pandemic. These developments have resulted in many central banks and governments stepping up efforts towards exploring a digital version of fiat currency. Some of this interest among central banks has been indigenous in nature for pursuing specific policy objectives - for example, facilitate negative interest rate monetary policy. Another driver is to provide the public with virtual currencies, that carry the legitimate benefits of private virtual currencies while avoiding the damaging social and economic consequences of private currencies.
What is a CBDC?
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It is important to understand and appreciate what precisely is a CBDC, and to do that one needs to understand what a currency is and what money is.
What is a currency?
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Let us start with money. As societies developed from hunters and gatherers material needs increased - to build a house, wear clothes, make weapons and implements etc. Since these needs could not be produced individually, people had to purchase them from others. These purchases were paid initially by barter - a leather skin cloak for a spear, maybe. As barter had its limits - how many cloaks for a spear - barter got standardized in terms of metals or cowrie shells. Now people knew the value of both the cloak and the spear in terms of bronze or cowrie shells. This was still barter, as both bronze and shells had intrinsic value (shells were desired for their beauty). This system evolved over time into metal currencies. Gold and silver coinage were the offshoot of this system where they had features of barter (both gold and silver had intrinsic value) as well as money (they were standardized representation of value). Somewhere along the way people improvised - instead of actual goods for barter they started using claims on goods, a bill of exchange in fact. These could be clay tablets in Mesopotamia or, as in China in the eleventh century, paper currency.
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In respect of money two facts emerge historically.
Money has taken the form of either commodities (which have intrinsic value) or in terms of debt instruments. When money does not have intrinsic value, it must represent title to commodities that have intrinsic value or title to other debt instruments. Paper currency is such a representative money and it is essentially a debt instrument. The owner of the currency knows who owes him or who has the underlying liability. There is always an ISSUER of representative money.
Money is usually issued by a sovereign. Private issuance of money - whether under sovereign license or otherwise - has existed in the past but has over time given way to sovereign issuance, for two reasons. Firstly, being a debt issuance, private money is only as good as the credit of the issuer. By definition, there can be multiple issuers. This makes private currency unstable. On the other hand, public currency, as it is backed by a sovereign, is unique to an economy and has better credit standing; therefore, it is more stable. Secondly, paper currency involves seignorage - the difference between the intrinsic value and the representative value which accrues to the issuer. This seignorage should not accrue to any private individual. It should accrue to the Government and thus used for public spending.
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Now we are in a position to provide a definition of a...
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