India Central Bank’s Michael Debabrata Patra Warns CBDC Could Increase Bank Run Risks

Central bank digital currencies (CBDCs), often highlighted for their potential to enhance financial inclusion and reduce settlement risks, may also pose significant threats to banking stability. According to Reserve Bank of India (RBI) Deputy Governor Michael Debabrata Patra, CBDCs could be falsely perceived as “safe havens” during financial crises, making uninsured bank deposits more vulnerable to mass withdrawals and potentially triggering “bank runs.”

Patra emphasized the growing significance of CBDCs for deposit insurers, who must prepare for scenarios where CBDCs are viewed 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 regarding the impact of CBDCs on bank deposits and deposit insurance. He noted that the effect of CBDCs on deposits and, consequently, on deposit insurance is largely “unknown as of today.” 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 eliminating settlement risks through direct central bank transactions and enhancing 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 assured the public that transactions would remain anonymous to some extent, emphasizing the e-rupee’s privacy features.

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

For more insights and updates on cryptocurrencies, investing, and finance, keep exploring Global Crypto News.

Post Views: 4