A game of catch-up on digital currency

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 A game of catch-up on digital currency

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• Paper currency of China: Marco Polo, the 13th c. traveller, was surprised to see "paper currency" in operation in China, something of a fantasy in Europe. In fact, right from the 9th c. Tang dynasty, paper currency as promissory notes was being used. Europe caught on many centuries later. And now, China has brought its first sovereign digital currency.
• CBDC: The People's Bank of China (PBoC) has been running large-scale trials of the Central Bank Digital Currency (CBDC) - the name is eCNY (Chinese Yuan). It works through a two-tier system - commercial banks act as gateways for eCNY distribution (just like cash), and quantum of eCNY held in wallets will be restricted.
• Experiments: The eCNY is being tested domestically as well as abroad too (cross-border payments). The classic central bank trilemma (low costs, low risks, high efficiencies) will be addressed by tying up with private sectors.
• BRI and eCNY: The global alliance could be the countries of Belt and Road Initiative (BRI), which anyway strives for financial integration. China may actually end up creating international standards in digital currencies. 
• Jolted into action: Most feel that CBDCs are inevitable, and no nation can afford to stay behind. In early 2020, six central banks decided to come together to study the multiple issues involved in this system - Canada, the UK, Japan, Sweden, Switzerland, the ECB and the BIS. US Fed also joined in. The report is now out.
• Definition of CBDC by BIS: "A CBDC must be convertible, convenient, accessible and low-cost, with a resilient system underlying. It must be available 24x7 and interoperable. It must be private and secure for public". The idea is to complement cash, not replace it. There surely are risks involved in a private currency (Libra of Facebook) or a CBDC (eCNY) becoming widely used in the West. Limits may need to be imposed.
• Of privacy: The West is more concerned about it than are the Chinese, who are focused on "controlled autonomy". The eCNY doesn't want convertibility but inter-operability. No one wants to undermine banks and FIs. 
• What is RBI doing: While 80 central banks are focused on creating their own CBDCs, the RBI is slow on this front. The 2017 rumour of "Laxmi", the RBI CBDC, proved hypothetical. But the govt. has an open mind on this matter.
• Don't miss this bus: The RBI's conservative stance on a CBDC is not correct, as the technology is evolving rapidly and major economies are going ahead. The RBI must join other Western central banks and develop technology together. Falling behind is not an option for a "Digital India".

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