RBI SPEECH.PDF - Central Bank Digital Currency – Is This...

Central Bank Digital Currency – Is This the Future of Money 1
Introduction
The idea of “Central Bank Digital Currencies” (CBDC) is not a recent development. Some
attribute the origins of CBDCs to Nobel laureate James Tobin 2 , 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.
2. 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now been replaced by their corresponding digital and electronic versions.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?
3. 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?
4. 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
1 Keynote address delivered by Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India, on July 22 nd , 2021
at the webinar organised by the Vidhi Centre for Legal Policy, New Delhi. The views expressed by the speaker
are personal.
2

Speech: Central Bank Digital Currencies: Is this the Future of Money?
2
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.