Where crypto politics and geopolitics merge
New forms of digital currency, whether public or private, can become vectors of geostrategy. Indeed, international payments are a most critical use case of both central bank digital currencies (CBDCs) – electronic forms of central bank money – and private cryptocurrencies. Lower transaction costs, efficient and immediate settlement and, if properly regulated, traceability, are just some of the characteristics that favor their globalization.
However, India will therefore need to guard against new forms of digital “dollarization” – where domestic cash is replaced by foreign digital currency. An innovation-driven approach is our best chance to do so.
In a 2021 survey of central banks, the Bank for International Settlements (BIS) found that 86% of them “actively seek out” CBDCs. This includes the Reserve Bank of India (RBI), which plans to deploy a CBDC pilot in 2022. Likewise, private cryptocurrencies that run on blockchain networks are making waves. As a precaution, about 15 million Indians are invested in this market.
CBDCs and private cryptocurrencies are about to clash. But there are compelling reasons why CBDCs and private cryptocurrencies should be seen as complementary rather than competitive.
Most important of these is that China has taken the lead in developing its CBDC, currently called e-CNY, and is far ahead of India and several developed countries in its deployment. China will make every effort to ensure that e-CNY is as widely accepted as the dollar, an outcome that may not fit our strategic calculation.
Currently, e-CNY is being tested in at least nine Chinese cities. Although it is mainly used in domestic retail payment markets, China can quickly come to terms with foreign partners to enable interoperability between e-CNY and its retail payment infrastructure. According to the BIS, the cross-border availability of CBDCs can further enhance “already significant network effects for international currencies”. In other words, the wide acceptance of e-CNY may also improve the status of the underlying currency – the yuan – at the expense of weaker currencies such as the rupee.
Experts noted that the e-CNY represents China’s best hope of circumventing sanctions to trade with partners such as North Korea and Iran, as CBDCs effectively disintermediate banks and other financial agencies that may be subject to such prohibitions. President Xi Jinping also called on China to participate in setting international digital currency standards to replace payment systems sensitive to US political pressure.
The upside is that India, unlike China, has not banned both the development and use of private cryptocurrencies. In typical command and control fashion, China has already “picked a winner.” As a result, India is ahead of China in the private cryptocurrency ecosystem. The Indian state now has the capacity to create useful oversight models around its vibrant national crypto-innovation ecosystem.
The emergence and adoption of cryptocurrencies and even CBDCs will have an uncertain impact on traditional institutions such as banks. The Bank of England (BOE) points out that demand for new forms of digital currency could cause bank deposits to leak. This could impact the cost of bank borrowing and therefore tighten credit conditions, which will lead to a decrease in lending. However, BOE also states that “it is only when new forms of digital currency emerge … that the implications for the wider financial system will begin to become apparent.” That is, experimentation is key – and India is free to do so on a large scale due to its burgeoning private cryptocurrency market.
India should look to crypto entrepreneurs as advisers to help them understand risk factors, share knowledge on developing a national CBDC, and come up with solutions to automate regulatory compliance. As an example, US crypto giant Coinbase, which has invested in Indian crypto exchanges that themselves now enjoy unicorn status, is part of an effort to create a tool that simplifies KYC and compliance related to the fight against money laundering for exchanges. .
Finally, unlike China, India is also well placed to mobilize international goodwill. BIS recognizes that international cooperation in technical arrangements will be the key to the development of digital currency. India should actively participate in relevant forums, such as those of the G20, to establish common standards to develop a competitive, responsible and secure CBDC ecosystem that is not dominated by e-CNY. Then again, India’s private crypto ecosystem can help the country by serving as a source of technical know-how.
A well-established private domestic market for a product, technological or otherwise, gives a country leverage in global conversations. China has missed the bus by shutting down its private cryptocurrency sector. India, in turn, must learn from this mistake and preserve the strategic advantage of its private cryptocurrency ecosystem. This will not only help it counter the rise of e-CNY, but also consolidate its own position as a world leader in a cutting-edge technological space.
Vivan Sharan and Meghna Bal are New Delhi-based tech policy experts
Opinions expressed are personal