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Central Bank of India analysts: “government digital currencies will make the banking system fragile”

Analysts at the Reserve Bank of India (RBI) believe central bank digital currencies could not only expand access to financial services, but also undermine the role of commercial banks in the economy.

Central Bank of India has published
report about the country’s monetary policy, which touches upon the topic of state stablecoins. RBI analysts noted their advantages, including the lack of anonymity compared to cash, the ability to monitor transactions, and increased public access to financial services. In addition, “helicopter money” – financial assistance from the state to support the economy, can be distributed in digital currencies of central banks. If government stablecoins generate interest income, this will enable the market to better respond to changes in interest rates and optimize monetary policy.

At the same time, RBI experts fear that digital currencies of central banks can provoke an outflow of money from financial and credit institutions. In other words, the need for banks will disappear, so there is a great risk of the “collapse” of the entire banking system. If the population starts holding large sums in government cryptocurrencies at interest, commercial banks will be forced to raise interest rates on deposits in order to retain their customers. Banks’ profits will be significantly reduced, so they will have to increase interest on loans.

“Digital currencies of central banks should not be perceived as ‘pure good’. Their implementation will lead to the fact that the banking system will become fragile, ”RBI analysts believe.

Analysts have expressed concern that if government cryptocurrencies are kept anonymous like regular crypto assets, they will also contribute to money laundering and terrorist financing. However, RBI is investigating the possibility of issuing a digital Indian rupee. Earlier, the State Institute for Intelligent Governance (NISG), with the support of the Government of India, developed a strategy for creating a digital rupee on a controlled blockchain. The Indian government is already preparing a bill that will simplify the development of a central bank’s digital currency and ban private cryptocurrencies.

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