India’s central bank sees risks in CBDC amid financial crisis

India central bank’s Michael Debabrata Patra warns CBDC could be falsely considered as a “safe haven,” increasing bank run risks.

Central bank digital currencies, touted for their potential to enhance financial inclusion and reduce settlement risks, may also pose significant risks to banking stability, Indian newspaper Business Standard reports, citing Reserve Bank of India deputy governor Michael Debabrata Patra.

Addressing the matter, Patra warned that CBDCs could be falsely considered as “safe havens” during financial crises, making uninsured bank deposits more susceptible to mass withdrawals and potentially triggering “bank runs.” Patra also emphasized the growing relevance of CBDCs for deposit insurers, who must prepare for scenarios where CBDCs are perceived as safer than traditional bank deposits.

“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.” Michael Debabrata Patra

The deputy governor highlighted several uncertainties surrounding the impact of CBDCs on bank deposits and deposit insurance. For instance, the impact of CBDC on deposits and hence deposit insurance is largely “unknown as of today,” Patra said, adding that the key concerns for deposit insurers include the extent to which CBDCs might replace bank deposits, the evolving roles of central and commercial banks, and the privacy aspects of CBDC transactions.

India sees risks in 24/7 CBDC payments

While acknowledging the benefits of CBDCs, such as the elimination of settlement risks through direct central bank transactions and the potential to enhance financial inclusion, Patra also underscored the operational risks posed by 24/7 digital payment systems. He warned that as digital payments become more prevalent, deposit insurers may face new challenges, especially with banks having a substantial share of non-domestic depositors.

Launched in December 2022, India’s CBDC — also known as the e-rupee — represents a tokenized version of the country’s traditional fiat currency. Following its launch, RBI officials emphasized the e-rupee’s privacy features, assuring the public that transactions would remain anonymous to some extent.

Despite these assurances, the CBDC’s adoption has been slow. By late June, the Reserve Bank of India reported achieving 1 million retail transactions with the e-rupee, but only after local banks started offering incentives to clients and distributed part of their employees’ salaries using the digital currency.