Reserve Bank of India (RBI) Deputy Governor Michael Debabrata Patra cautioned against Central bank digital currencies (CBDCs) becoming safe havens in times of crisis leaving bank deposits – particularly uninsured deposits – more prone to withdrawal and may even cause bank runs.

The deputy governor said deposit insurers need to contend with the possibility of the CBDCs being perceived as a safe haven during crises triggering depositor panic, thus rendering bank deposits, particularly uninsured deposits, more prone to withdrawal and hence the risk of bank runs.

“Given the inherent links between such systems and the objectives and operations of deposit insurers, it is expected that the topic of CBDC will continue to grow in relevance for deposit insurers,” he added.

Patra also said that the operating models and design features of each individual jurisdiction’s CBDC would be a crucial factor in expanding understanding of the balance of risks. “The impact of CBDC on deposits and hence deposit insurance is largely unknown as of today.”

“For deposit insurers, factors of key interest would be the degree of replacement of bank deposits by CBDC, the division of labour between central and commercial banks and the degree of privacy attached to CBDC usage,” he said.

“As an increasing number of Central banks face the risk of large-scale use by the public of private or digital instruments that may not be backed by or denominated in the domestic currency, CBDCs may assist in mitigating this risk by being a central bank liability and a form of digital cash,” he said.

He further highlighted that with digital payments gaining traction, deposit insurers have to re-evaluate operational risks posed to depositors and member banks from the emergence of these 24/7 payment systems.

Notably, a bank run happens when a large portion of customers withdraw money from their accounts in a brief period, and it is triggered due to fear of an impending crisis.

CBDC is a legal tender or fiat currency issued by a central bank in a digital form.

RBI started a pilot for wholesale CBDC in November 2022 and retail CBDC in December 2022.