Trial for India's CBDC could start as early as December

India may not be serious about cryptocurrencies but seems pretty adamant about launching its own Central Bank Digital Currency (CBDC). Even at that, India may be starting trials of Digital Rupee by December. India's Central Bank Governor indicated this in a recent interview he gave to CNBC's local division. Link

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In his interview, the Central Bank Governor stated that the bank is still assessing aspects such as the security of its CBDC and the digital currency's impact on banks, monetary policy, and currency in circulation. This begs the question - What is the bank testing if none of the above aspects have been assessed yet.

China was the first country to announce a testing program related to CBDCs. Other countries felt the pressure and decided to launch similar programs - Sweden, Japan, France, and Switzerland to name a few. El Salvador, of course, simply made Bitcoin legal tender.

It is quite clear that apart from the initial noise that these programs generated, they have not gone anywhere. The reason is quite clear. Right now Central Banks set benchmark interest rates and regulate banks. Banks use the benchmark interest rates and help create new money through lending at interest rates that are linked to the benchmark rates. This process involves assessing the credit profile of the consumer and deciding on a rate of interest for that consumer's loan accordingly. This means that Central Bankers are very powerful people despite doing very little in the economy. It is also not true anymore that Central Banks are independent entities, whether we talk about developed countries, developing countries, or frontier markets.

In a utopian scenario, the real use case of a CBDC is that each citizen can have a wallet with the Central Bank, and based on the credit history of that individual, Central Banks can offer them better saving/lending rates. A CBDC should also ideally get rid of the money multiplier effect. In reality, an effective CBDC should remove the need for banks in the economy. In such a scenario, banks should only exist to help companies raise money and provide broking services. However, DeFi also removes that aspect. ICOs have shown that companies can raise money directly without needing a bank. DeFi exchanges have also shown that market-making can also be done via algorithms. So, in reality, Banks are not needed in the Utopian world with successful digital currencies.

However, as we all know, none of these CBDC projects are actually real. They are gimmicks at best - at least for the foreseeable future. In the current scenario, classically trained economists cannot deleverage the entire economy by having a fully backed CBDC that does away with the concept of a money multiplier. Also, the whole exercise to attain utopia is gargantuan in nature and not risk-worthy enough for any bureaucrat. Central Bankers get all the limelight by doing very few things. Why on earth would they want banking operations under them? Lastly, having a digital currency that doesn't do anything apart from the fact that it's based on "blockchain" technology is like having a paper currency that has been digitized via a bank account - something we already have.

I don't see a point in CBDCs at all. India may start trials of CBDC because just like any other country, they also need to show that they are neck-to-neck with China when it comes to financial innovation. However, apart from being a marketing exercise, not much use will come out of this.

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