Should the Indian central bank release its own cryptocurrency?

Photo credit: William Warby.

Yesterday, Livemint argued that the Indian central bank – the Reserve Bank of India or RBI – should release its own cryptocurrency, “Bharatcoin”.

For those new to the world of cryptocurrencies, they are a digital alternative to bank-released currency. In their purest form, cryptocurrencies are unregulated and work across borders – except in countries where they’re banned. The first form of cryptocurrency to officially take off and become decentralized was Bitcoin.

The way I see it, there are two opposing aspects to the RBI establishing its own digital currency: the first is more stability, and the latter is the possibility of killing a trend that has the potential to change the world.

Stable

In the US a similar idea, the Fedcoin, has been tossed around for a few years. It will be run by the Federal Reserve System – America’s central bank – which will treat it just like any other currency it monitors. Each Fedcoin will be equivalent to something the bank releases – say US$1.

The reason why people support this idea is that if Fedcoin is distributed from the central bank, the exchange rate can be fixed. This makes it more stable and interoperable than a digital currency operated by a private company.

It’s an attractive quality – the instability of digital currencies is a big reason they haven’t taken off in a sustainable manner. Because it fluctuates based on a company’s own resources, the value of a privately-run digital currency is volatile. Most people have been afraid to buy cryptocurrency in large amounts.

Bill Gates summed it up well in an AMA on Reddit last year. He explained that he enjoys the secure, digital aspect of digital currencies but doesn’t support them because of volatility: “The poor shouldn’t have a currency whose value goes up and down a lot compared to their local currency.”

That’s particularly pertinent to India, where fintech’s greatest potential lies in addressing the millions of people who are too poor to use banks. If the RBI were to release a digital currency, it would be much safer to use than an alternative privately-owned digital currency. And all you would need to use it is a smartphone. The possibilities – increased ecommerce purchases, buying online education, developers earning money out of rural areas – would be endless.

Killing the dream

Photo credit: Pascal.

Yet, it’s important to remember that in its current state, the RBI is still trying to understand its own opinions on disruptive fintech trends and what they mean for India’s many private banks.

First off, there’s the basic philosophy of cryptocurrency. The grand vision for digital currencies is that they will completely take power away from banks and let people trade freely across the globe.

Furthermore, they don’t require intermediaries or the usual KYC (know your customer) procedures that banks need to work. That means less layers, less paperwork, and less expenses. For consumers, that translates to lower transaction costs, and faster processing time.