India’s Central Bank Flags Risks in CBDC Adoption Amid Financial Instability

India’s central bank has raised concerns about the potential risks posed by Central Bank Digital Currencies (CBDCs), particularly during financial crises, according to a report from Business Standard. Michael Debabrata Patra, Deputy Governor of the Reserve Bank of India (RBI), cautioned that CBDCs might be mistakenly viewed as “safe havens” during economic turmoil, thereby increasing the likelihood of bank runs.

Patra noted that while CBDCs are often promoted for their ability to enhance financial inclusion and reduce settlement risks, they could inadvertently destabilize banking systems. He warned that in a crisis, the perception of CBDCs as more secure than traditional uninsured bank deposits could lead to mass withdrawals, exacerbating financial instability.

“The relationship between CBDCs and deposit insurance is complex and evolving,” Patra remarked, emphasizing that deposit insurers need to prepare for scenarios where CBDCs overshadow conventional bank deposits. He expressed concern over the uncertainties surrounding CBDCs, particularly their potential to disrupt traditional banking functions, influence the roles of central and commercial banks, and raise privacy issues.

Patra also highlighted the risks associated with 24/7 digital payment systems enabled by CBDCs. While these systems could eliminate settlement risks and promote financial inclusion, they also introduce new operational challenges, especially for banks with a significant share of non-domestic depositors.

India launched its CBDC, the e-rupee, in December 2022 as a digital counterpart to its fiat currency. Despite initial assurances regarding privacy and anonymity, the e-rupee’s adoption has been slow, with the RBI reporting only 1 million retail transactions by June 2023. This milestone was achieved only after local banks incentivized its use by distributing part of their employees’ salaries in the digital currency.

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