India’s central bank sees risks in CBDC amid financial crisis

Reserve Bank of India Governor Michael Debabrata Patra warns that CBDC could be mistakenly considered a “safe haven” and increase the risks of bank runs.

Central bank digital currencies, touted for their potential to increase financial inclusion and reduce payment risks, could also pose significant risks to banking stability, Indian newspaper Business Standard reported, citing Reserve Bank of India Deputy Governor Michael Debabrata Patra.

Addressing the issue, Patra warned that CBDCs could be mistakenly considered “safe havens” during financial crises, making uninsured bank deposits more prone to mass withdrawals and potentially triggering “bank runs.” Patra also stressed that CBDCs are becoming increasingly important to deposit insurers, and they need to prepare for scenarios where CBDCs are perceived as safer than traditional bank deposits.

“Given the inherent connections between such systems and the objectives and operations of deposit insurers, the importance of CBDC to deposit insurers is expected to continue to grow.” Michael Debabrata Patra

The deputy governor highlighted several uncertainties regarding the impact of CBDCs on bank deposits and deposit insurance. For example, the impact of CBDCs on deposits and therefore deposit insurance is largely “unknown as of today,” Patra said, adding that key concerns for deposit insurers are the extent to which CBDCs could replace bank deposits, the changing roles of central and commercial banks, and the privacy aspects of CBDC transactions.

India sees risk in 24/7 CBDC payments

While acknowledging the benefits of CBDCs, such as eliminating settlement risks through direct central bank transactions and the potential to increase financial inclusion, Patra also highlighted the operational risks posed by 24/7 digital payment systems. He warned that deposit insurers could face new challenges as digital payments become more widespread, particularly as banks hold a significant proportion of foreign deposits.

Launched in December 2022, India’s CBDC — also known as the e-rupee — represents a tokenized version of the country’s traditional fiat currency. Following its launch, RBI officials emphasized the privacy features of the e-rupee, assuring the public that transactions would remain anonymous to a degree.

Despite these assurances, CBDC adoption has been slow. By the end of June, the Reserve Bank of India reported 1 million retail transactions in e-rupee, but this only happened after local banks started offering incentives to their customers and distributing a portion of their employees’ salaries using the digital currency.