The Reserve Bank of India sees a Central Bank Digital Currency (CBDC) as mixed blessing as it has the potential to bring about a sea change in payment transactions and quicken transmission, while it poses a risk of disintermediation of the banking system.

“CBDC, once introduced, can bring about a sea change in payment transactions, quickening transmission,” the central bank made the statement in its Report on Currency and Finance (RCF) for the year 2020-21 said. It adding that this could be of greater relevance with the eventual decline in the usage of (physical) currency gaining traction.

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It said the attractiveness of CBDC stems from its digital feature as well as from being a sovereign liability.

“CBDC can be designed to promote non-anonymity at the individual level, monitor transactions, promote financial inclusion by direct benefit fiscal transfer, pumping central bank ‘helicopter money’ and even direct public consumption to a select basket of goods and services to increase aggregate demand and social welfare,” the report said adding it can acting as a direct instrument of monetary transmission. Besides, an interest-bearing CBDC can increase the economy’s response to changes in the policy rate, it said.

CBDC is, however, not an unmixed blessing it poses a risk of disintermediation of the banking system, more so if the commercial banking system is perceived to be fragile, the report said.

“The public can convert their CASA (current account savings account) deposits with banks into CBDC, thereby raising the cost of bank-based financial intermediation with implications for growth and financial stability,” it said. It added that in countries with significant credit markets, banks may lose primacy as the major conduit of monetary policy transmission.

To control disintermediation, a proposed solution is to introduce a two-tier remuneration system for CBDCs, whereby transaction balances held by an individual remain interest free and are subject to a ceiling while CBDC balances of the individual over and above the ceiling are subject to a penal negative interest rate.

It added that the findings of the report do not represent its view.

On Thursday, RBI Governor Shaktikanta Das said a lot of work is going on internally in the RBI on CBDC and some broad guidelines and approach papers will be released on it soon.