CBDC – Potential Threat to the Banking System: Warning from India

Deputy Governor of RBI Warns of Risks Associated with Central Bank Digital Currencies

According to a warning by Michael Debabrata Patra, Deputy Governor of the Reserve Bank of India (RBI), central bank digital currencies (CBDCs) may present a serious threat to the stability of the banking system. Patra pointed out that while CBDCs have the potential to improve financial inclusion and reduce settlement risks, there is a risk that they may be falsely perceived as a “safe harbor.”

Bank Run Risks Associated with Central Bank Digital Currencies

As the Deputy Governor of the RBI indicates, during financial crises, there is a risk that CBDCs could be seen as safer than traditional bank deposits, leading to mass withdrawals and bank runs. Therefore, it is crucial to understand the potential consequences of introducing central bank digital currencies.

Uncertainties and Risks Related to CBDCs

There are also other uncertainties associated with the introduction of central bank digital currencies, such as the possibility of replacing bank deposits with CBDCs, the evolving roles of central and commercial banks, and privacy issues in CBDC transactions. The RBI emphasizes the need to analyze these aspects considering the entire financial system.

Indian e-Rupee as an Example of Central Bank Digital Currency

In December 2022, India launched its own central bank digital currency, known as the e-Rupee. It is a tokenized version of the country’s traditional fiat currency. Despite ensuring transaction privacy, the adoption process of e-Rupee was initially slow. By the end of June of this year, around 1 million retail transactions had been processed using e-Rupee.

Conclusion

The debate on the introduction of central bank digital currencies is still ongoing, and financial institutions worldwide are seeking to understand the implications of such a move. The RBI’s warnings regarding bank run risks associated with CBDCs are a significant voice in this discussion, highlighting the need for caution and thorough analysis of potential impacts on the entire financial system.