7 ms·

Meh. The article expends zero effort in actually engaging with the Reserve Bank of India's motivations or the CBDC design [1], and is filled with shallow commen

Meh. The article expends zero effort in actually engaging with the Reserve Bank of India's motivations or the CBDC design [1], and is filled with shallow comments about the roll-out in other countries. This is a very important topic as it has the potential to reshape banking/economics on the timescale of decades. For a good down-to-earth understanding of "layer 1" -vs- "layer 2" money, refer the following post [2]. India's digital payments ecosystem (the "UPI") has been an unparallelled success at the second layer. Beyond that, there are many motivations that make it potentially interesting to consider digital layer 1 money -- starting with the costs of managing paper money, reducing settlement risk, potentially smoothing cross-border payments, the possibility of setting negative interest rates, etc. There are definitely pros and cons, but I'm yet to find a comprehensive and well thought-out analysis (and would appreciate any links!), especially in the Indian context. [1]: RBI Concept Note on CBDC: https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONCEPTNOTEACB531172E0B4DFC9A6E506C2C24FFB6.PDF https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONC... [2]: https://brettscott.substack.com/p/casino-chip-cashless-society https://brettscott.substack.com/p/casino-chip-cashless-socie...

blackoil 4y ago
Paper money is a small percentage of total money, and a much smaller percentage in terms of actual transactions. Most of the money is already digital.
- themoonisachees 4y ago
  Isn't that highly affected by how much money rich people (ie users of digital money) have? One whould think paper money still is used by a good 50% of the worlds poorest, but they can't hold a candle to the amount hedge funds, banks and simply normal people from western countries move around compared to them.
- gokuldas011011 4y ago
  Isn't all money still paper behind the scenes, where the banks transfer to one another
  - PeterisP 4y ago
    Banks generally settle their accounts by digital transfers in their central bank accounts - no physical cash involved, they're trading IOUs from the central bank of the respective currency.
  - pbronez 4y ago
    nope. No way the modern economy could function if you had to lug around pallets of cash all the time. Similar to the reasoning for going off the gold standard. The problem, of course, is that when the money is just a number on a screen, it's very difficult to ensure that the humans running the database don't magically decide they have a bigger number than they aught to. This is an unsolved problem.
- nmridul 4y ago
  Maybe transaction wise paper money is still a small percentage. But my understanding (correct me if wrong) is that the total money running in the country at any momemnt is never more than what is printed. With digital money the central bank can issue it without the cost to print. As per (1) it costs around Rs 10 to Rs 17 to print Rs 100 note and have to be reprinted once they get damaged. (1) https://www.hindustantimes.com/business/will-digital-currency-pave-way-for-paperless-money-in-india-101667360099243.html https://www.hindustantimes.com/business/will-digital-currenc...
  - PeterisP 4y ago
    This is not true, the total money in circulation is far more than what is printed. For example, USA has ~$2T of physical cash printed (https://www.uscurrency.gov/life-cycle/data/circulation https://www.uscurrency.gov/life-cycle/data/circulation) ; the M1 money supply (effective cash in circulation, including account balances, etc) is ~$20T - https://tradingeconomics.com/united-states/money-supply-m1 https://tradingeconomics.com/united-states/money-supply-m1 .
  - pbronez 4y ago
    I'm sorry to say that you are incorrect. There is not a specific number of itemized money units that define a fixed money supply. In fact, not even stock certificates work that way! It's all elastic, and central banks have sophisticated mechanisms to tighten or loosen that elastic band. The entire financial industry exists to think of novel ways to create leverage, stitching together assets and promises into towering edifices of economic power... all founded on the idea/hope/prayer that nobody will call in all the bets at once. Honestly, you might not want to look behind the curtain on this one. It's one of those existential risks you can't effect as a single human. It's a collective suspension of disbelief that allows the modern world to function. If/when the correction happens... it will not be fun to live through. If you're a glutton for punishment, here's some reading: "Chapter 2 studies leverage in the nonfinancial private sector before and during the COVID-19 crisis, pointing out that policymakers face a trade-off between boosting growth in the short term by facilitating an easing of financial conditions and containing future downside risks. This trade-off may be amplified by the existing high and rapidly building leverage, increasing downside risks to future growth. " https://www.imf.org/en/Publications/GFSR https://www.imf.org/en/Publications/GFSR https://research.macrosynergy.com/the-global-leverage-problem/ https://research.macrosynergy.com/the-global-leverage-proble... https://www.imf.org/en/Blogs/Articles/2021/03/29/confronting-the-hazards-of-rising-leverage https://www.imf.org/en/Blogs/Articles/2021/03/29/confronting... https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier https://www.investopedia.com/terms/l/leverageratio.asp https://www.investopedia.com/terms/l/leverageratio.asp https://www.investopedia.com/terms/r/rehypothecation.asp https://www.investopedia.com/terms/r/rehypothecation.asp
- mitthrowaway2 4y ago
  Paper money still has a very important role, because it can't simply be deleted from your account. That's important, because central banks are considering negative interest rate policy, which would mean your bank account would drop by a percentage each month. This would drive people to spend or invest their money, supporting consumption and inflating asset prices. The reason they can't do that right now is because many people would withdraw their funds and hold cash. That option needs to be removed for negative interest rate policy to be broadly implemented. (There are a few places, like Europe, where interest rates already went negative, but only slightly and it only applied to institutions like banks).
  - philwelch 4y ago
    That’s horrifying and I have a hard time imagining that sort of thing happening in any functional democracy.
    - mitthrowaway2 4y ago
      You might, but the central banks don't! It's a recurring theme in published research papers by economists and by the central banks themselves. It's called "breaking through the zero bound" on monetary policy, or "removing the effective lower bound". The tone in these papers is universally that this would be desirable for the central bank, but hard for the public to accept. For example from the Fed: "The Case for Unencumbering Interest Rate Policy at the Zero Bound", https://www.kansascityfed.org/documents/7033/GoodfriendPaper_JH2016.pdf https://www.kansascityfed.org/documents/7033/GoodfriendPaper... > With these advantages in mind, the final portion of the paper describes in detail three methods by which the zero bound on interest rate policy can be unencumbered completely. The three methods in turn would: 1) abolish paper currency, 2) introduce a market-determined flexible deposit price of paper currency, and 3) provide electronic currency (to pay or charge interest) at par with deposits. Or the Bank of Canada's paper, "Is a Cashless Society Problematic?", https://www.bankofcanada.ca/2018/10/staff-discussion-paper-2018-12/ https://www.bankofcanada.ca/2018/10/staff-discussion-paper-2... > a cashless society could open the door to the prospect of negative interest rates to a greater extent than is currently possible. Most central banks are obligated by law to supply cash to the general public. To the extent that the economy becomes cashless, a central bank could request a change in its governing legislation to remove the obligation to supply cash to the public on demand (which is a significant step). In that case, in the absence of cash and of an obligation to supply it, a central bank would be able to lower interest rates to a more negative level than is currently possible to achieve stabilization or price stability goals.
ano-ther 4y ago
Here is a bit more on the international efforts for CBDCs https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm https://news.ycombinator.com/item?id=33865185 https://news.ycombinator.com/item?id=33865185
potamic 4y ago
Most examinations of CBDC paint a grim picture of things to come, mostly in terms of yielding absolute power to the central bank. As with any situation involving power, with good intentions you can do wonderful things, with bad intentions you can do equally horrifying things. In the Indian context, the latter is of particular concern, especially when one man can demonetise the whole country overnight on a whim. There was a good discussion here on CBDC sometime back - https://news.ycombinator.com/item?id=27805709 https://news.ycombinator.com/item?id=27805709
- ssivark 4y ago
  Thanks for the link -- it is a nice discussion, and contains pointers to interesting content that I wasn't aware of. (likewise, for the sibling comment with links about mBridge) I appreciate the privacy concerns, but for anyone reading, the tradeoffs have a completely different meaning in the Indian context. 1. A fraction of the Indian populace is so poor that the cost of operating a cash economy (printing currency, transporting it securely, stocking and operating ATMS and bank branches) might prove forbiddingly expensive to service rural areas -- leading to financial exclusion. So, for them, digital infrastructure (which reduces cost of transacting) is a matter of life support, rather than the luxury that it is in the developed world (where everyone has bank accounts, access to cheap credit, and can swipe plastic cards everywhere). 2. While demonetization might have been a horrible fiasco, India's digital payments system (UPI) has been a phenomenal success -- there is substantial evidence on the ground to support that. (The former was arguably used to drive adoption for the latter, but whatever.) The state derives substantial trust from its citizens for this and other developmental and sociopolitical factors. 3. To generalize from those two nuggets -- the Indian populace (with its distinct history and cultural context) has a different relation with the Indian state -vs- banks -vs- corporations, compared to the situation in other countries. Therefore, the factors influencing trust/distrust, the developmental needs & aspirations, the politics, etc are substantially different. It makes very little sense to try and understand Indian concerns and preferences with a perspective honed elsewhere. Eg: In a system where you might trust the state more than possibly corrupt intermediaries (for a complicated array of reasons), the trust calculus is completely inverted. I'm not saying this is necessarily the case, or that nothing generalizes across countries, but the point is that the ground realities are completely different, and they influence the tradeoffs one is willing to put up with. 4. On the specific theme of privacy: the RBI concept note devotes section 7.7 to it. I wish it were more thorough, maybe it's acceptable at this preliminary stage, and can be improved through iteration... but that's an example of the kind of thoughtful commentary that would be very useful -- an analysis of specific shortcomings and/or potential improvements.
rvz 4y ago
> India's digital payments ecosystem (the "UPI") has been an unparallelled success at the second layer. Hence the reason why the RBI will eventually use UPI to piloting their CBDC on top of it anyway and force all of India to use it. That should scare us all.
- rajup 4y ago
  > That should scare us all. Why?
  - rvz 4y ago
    This is why [0]. Some board members at the European Central Bank (ECB) are already considering suggesting spending and saving limits on CBDCs including the digital euro and that should tell you where these CBDC pilots are going to go if successful and how very dystopian that would be already. Oh dear. [0] https://reclaimthenet.org/digital-euro-spending-saving-limits https://reclaimthenet.org/digital-euro-spending-saving-limit...
    - imtringued 4y ago
      We already live in a dystopia where transaction sabotage is being compensated with more money to sabotage.
    - rajup 4y ago
      That’s not what it says. It says there will be transaction amount limits above which transactions would be recorded. Again this information is already available to governments when required.
      - rvz 4y ago
        > That’s not what it says. It says there will be transaction amount limits above which transactions would be recorded. Yet it also says in the same source about an ECB member; Fabio Panetta, mentioning in the video about introducing savings limits which I said earlier [0]: "What we are discussing is the possibility of introducing limits for individual users,” Panetta said. “For example, we have been discussing many numbers... €3,000." > Again this information is already available to governments when required. Of course. They always have been doing it out in the open for other governments to try out having their own CBDCs, which is still clearly dystopian and will press forward on it like it or not. [0] https://reclaimthenet.org/digital-euro-spending-saving-limits https://reclaimthenet.org/digital-euro-spending-saving-limit...
jsmith45 4y ago
At least from a US perspective, type 1 money also has a digital component, just one only available to banks. I'm not familiar enough with how India's central bank works to know if things are similar, but the concept note makes it sound like it might be. The accounts that members banks have at the Federal Reserve are legally equivalent to paper money. The banks can exchange part of that account balance for paper money, or exchange paper money for that account balance at any time. To settle debts between banks they almost never cart truckloads of cash between each other, but simply ask the federal reserve banks to adjust their balances accordingly. This looks a LOT like the layer 2 money that banks create, but it is layer 1. If RBI works similarly, then it is not really apparent why a wholesale CBDC would have substantial value. Interbank settlement would already occur via balance transfers at the central bank. It is not even remotely clear to me how an "account-based" wholesale CBDC would differ from the status quo at all. The main thing they mention is allowing more conditions to be attached to transactions allowing "programming" the central bank money (presumably in ways similar to "smart contracts"). There is no mention of why that could not simply be done by enhancing the existing systems, but they also point out that it could be a new tech stack from ground up, which suggests that they feel the existing tech stack has flaws. Retail CBDC would be potentially more interesting, but also far more controversial. Nobody really cares about a central bank keeping a close eye on how banks send money to each other, but a retail CBDC is effectively an attempt to replace cash. There are a lot of issues with that, like people want privacy in cash transactions, but there is no way the bank wants create a new means of money laundering or similar. The fact that many plans for retail CBDCs seem to want desperately to adopt as many crypto currency technologies as possible causes lot of worry. Thinks like losing private keys meaning loss of money (and if intermediaries hold keys instead, you better hope they have really good information security.)

blackoil 4y ago

Paper money is a small percentage of total money, and a much smaller percentage in terms of actual transactions. Most of the money is already digital.

themoonisachees 4y ago
Isn't that highly affected by how much money rich people (ie users of digital money) have? One whould think paper money still is used by a good 50% of the worlds poorest, but they can't hold a candle to the amount hedge funds, banks and simply normal people from western countries move around compared to them.
gokuldas011011 4y ago
Isn't all money still paper behind the scenes, where the banks transfer to one another
- PeterisP 4y ago
  Banks generally settle their accounts by digital transfers in their central bank accounts - no physical cash involved, they're trading IOUs from the central bank of the respective currency.
- pbronez 4y ago
  nope. No way the modern economy could function if you had to lug around pallets of cash all the time. Similar to the reasoning for going off the gold standard. The problem, of course, is that when the money is just a number on a screen, it's very difficult to ensure that the humans running the database don't magically decide they have a bigger number than they aught to. This is an unsolved problem.
nmridul 4y ago
Maybe transaction wise paper money is still a small percentage. But my understanding (correct me if wrong) is that the total money running in the country at any momemnt is never more than what is printed. With digital money the central bank can issue it without the cost to print. As per (1) it costs around Rs 10 to Rs 17 to print Rs 100 note and have to be reprinted once they get damaged. (1) https://www.hindustantimes.com/business/will-digital-currency-pave-way-for-paperless-money-in-india-101667360099243.html https://www.hindustantimes.com/business/will-digital-currenc...
- PeterisP 4y ago
  This is not true, the total money in circulation is far more than what is printed. For example, USA has ~$2T of physical cash printed (https://www.uscurrency.gov/life-cycle/data/circulation https://www.uscurrency.gov/life-cycle/data/circulation) ; the M1 money supply (effective cash in circulation, including account balances, etc) is ~$20T - https://tradingeconomics.com/united-states/money-supply-m1 https://tradingeconomics.com/united-states/money-supply-m1 .
- pbronez 4y ago
  I'm sorry to say that you are incorrect. There is not a specific number of itemized money units that define a fixed money supply. In fact, not even stock certificates work that way! It's all elastic, and central banks have sophisticated mechanisms to tighten or loosen that elastic band. The entire financial industry exists to think of novel ways to create leverage, stitching together assets and promises into towering edifices of economic power... all founded on the idea/hope/prayer that nobody will call in all the bets at once. Honestly, you might not want to look behind the curtain on this one. It's one of those existential risks you can't effect as a single human. It's a collective suspension of disbelief that allows the modern world to function. If/when the correction happens... it will not be fun to live through. If you're a glutton for punishment, here's some reading: "Chapter 2 studies leverage in the nonfinancial private sector before and during the COVID-19 crisis, pointing out that policymakers face a trade-off between boosting growth in the short term by facilitating an easing of financial conditions and containing future downside risks. This trade-off may be amplified by the existing high and rapidly building leverage, increasing downside risks to future growth. " https://www.imf.org/en/Publications/GFSR https://www.imf.org/en/Publications/GFSR https://research.macrosynergy.com/the-global-leverage-problem/ https://research.macrosynergy.com/the-global-leverage-proble... https://www.imf.org/en/Blogs/Articles/2021/03/29/confronting-the-hazards-of-rising-leverage https://www.imf.org/en/Blogs/Articles/2021/03/29/confronting... https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier https://www.investopedia.com/terms/l/leverageratio.asp https://www.investopedia.com/terms/l/leverageratio.asp https://www.investopedia.com/terms/r/rehypothecation.asp https://www.investopedia.com/terms/r/rehypothecation.asp
mitthrowaway2 4y ago
Paper money still has a very important role, because it can't simply be deleted from your account. That's important, because central banks are considering negative interest rate policy, which would mean your bank account would drop by a percentage each month. This would drive people to spend or invest their money, supporting consumption and inflating asset prices. The reason they can't do that right now is because many people would withdraw their funds and hold cash. That option needs to be removed for negative interest rate policy to be broadly implemented. (There are a few places, like Europe, where interest rates already went negative, but only slightly and it only applied to institutions like banks).
- philwelch 4y ago
  That’s horrifying and I have a hard time imagining that sort of thing happening in any functional democracy.
  - mitthrowaway2 4y ago
    You might, but the central banks don't! It's a recurring theme in published research papers by economists and by the central banks themselves. It's called "breaking through the zero bound" on monetary policy, or "removing the effective lower bound". The tone in these papers is universally that this would be desirable for the central bank, but hard for the public to accept. For example from the Fed: "The Case for Unencumbering Interest Rate Policy at the Zero Bound", https://www.kansascityfed.org/documents/7033/GoodfriendPaper_JH2016.pdf https://www.kansascityfed.org/documents/7033/GoodfriendPaper... > With these advantages in mind, the final portion of the paper describes in detail three methods by which the zero bound on interest rate policy can be unencumbered completely. The three methods in turn would: 1) abolish paper currency, 2) introduce a market-determined flexible deposit price of paper currency, and 3) provide electronic currency (to pay or charge interest) at par with deposits. Or the Bank of Canada's paper, "Is a Cashless Society Problematic?", https://www.bankofcanada.ca/2018/10/staff-discussion-paper-2018-12/ https://www.bankofcanada.ca/2018/10/staff-discussion-paper-2... > a cashless society could open the door to the prospect of negative interest rates to a greater extent than is currently possible. Most central banks are obligated by law to supply cash to the general public. To the extent that the economy becomes cashless, a central bank could request a change in its governing legislation to remove the obligation to supply cash to the public on demand (which is a significant step). In that case, in the absence of cash and of an obligation to supply it, a central bank would be able to lower interest rates to a more negative level than is currently possible to achieve stabilization or price stability goals.

ano-ther 4y ago

Here is a bit more on the international efforts for CBDCs https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm https://news.ycombinator.com/item?id=33865185 https://news.ycombinator.com/item?id=33865185

potamic 4y ago

Most examinations of CBDC paint a grim picture of things to come, mostly in terms of yielding absolute power to the central bank. As with any situation involving power, with good intentions you can do wonderful things, with bad intentions you can do equally horrifying things. In the Indian context, the latter is of particular concern, especially when one man can demonetise the whole country overnight on a whim. There was a good discussion here on CBDC sometime back - https://news.ycombinator.com/item?id=27805709 https://news.ycombinator.com/item?id=27805709

ssivark 4y ago
Thanks for the link -- it is a nice discussion, and contains pointers to interesting content that I wasn't aware of. (likewise, for the sibling comment with links about mBridge) I appreciate the privacy concerns, but for anyone reading, the tradeoffs have a completely different meaning in the Indian context. 1. A fraction of the Indian populace is so poor that the cost of operating a cash economy (printing currency, transporting it securely, stocking and operating ATMS and bank branches) might prove forbiddingly expensive to service rural areas -- leading to financial exclusion. So, for them, digital infrastructure (which reduces cost of transacting) is a matter of life support, rather than the luxury that it is in the developed world (where everyone has bank accounts, access to cheap credit, and can swipe plastic cards everywhere). 2. While demonetization might have been a horrible fiasco, India's digital payments system (UPI) has been a phenomenal success -- there is substantial evidence on the ground to support that. (The former was arguably used to drive adoption for the latter, but whatever.) The state derives substantial trust from its citizens for this and other developmental and sociopolitical factors. 3. To generalize from those two nuggets -- the Indian populace (with its distinct history and cultural context) has a different relation with the Indian state -vs- banks -vs- corporations, compared to the situation in other countries. Therefore, the factors influencing trust/distrust, the developmental needs & aspirations, the politics, etc are substantially different. It makes very little sense to try and understand Indian concerns and preferences with a perspective honed elsewhere. Eg: In a system where you might trust the state more than possibly corrupt intermediaries (for a complicated array of reasons), the trust calculus is completely inverted. I'm not saying this is necessarily the case, or that nothing generalizes across countries, but the point is that the ground realities are completely different, and they influence the tradeoffs one is willing to put up with. 4. On the specific theme of privacy: the RBI concept note devotes section 7.7 to it. I wish it were more thorough, maybe it's acceptable at this preliminary stage, and can be improved through iteration... but that's an example of the kind of thoughtful commentary that would be very useful -- an analysis of specific shortcomings and/or potential improvements.

rvz 4y ago

> India's digital payments ecosystem (the "UPI") has been an unparallelled success at the second layer. Hence the reason why the RBI will eventually use UPI to piloting their CBDC on top of it anyway and force all of India to use it. That should scare us all.

rajup 4y ago
> That should scare us all. Why?
- rvz 4y ago
  This is why [0]. Some board members at the European Central Bank (ECB) are already considering suggesting spending and saving limits on CBDCs including the digital euro and that should tell you where these CBDC pilots are going to go if successful and how very dystopian that would be already. Oh dear. [0] https://reclaimthenet.org/digital-euro-spending-saving-limits https://reclaimthenet.org/digital-euro-spending-saving-limit...
  - imtringued 4y ago
    We already live in a dystopia where transaction sabotage is being compensated with more money to sabotage.
  - rajup 4y ago
    That’s not what it says. It says there will be transaction amount limits above which transactions would be recorded. Again this information is already available to governments when required.
    - rvz 4y ago
      > That’s not what it says. It says there will be transaction amount limits above which transactions would be recorded. Yet it also says in the same source about an ECB member; Fabio Panetta, mentioning in the video about introducing savings limits which I said earlier [0]: "What we are discussing is the possibility of introducing limits for individual users,” Panetta said. “For example, we have been discussing many numbers... €3,000." > Again this information is already available to governments when required. Of course. They always have been doing it out in the open for other governments to try out having their own CBDCs, which is still clearly dystopian and will press forward on it like it or not. [0] https://reclaimthenet.org/digital-euro-spending-saving-limits https://reclaimthenet.org/digital-euro-spending-saving-limit...

jsmith45 4y ago

At least from a US perspective, type 1 money also has a digital component, just one only available to banks. I'm not familiar enough with how India's central bank works to know if things are similar, but the concept note makes it sound like it might be. The accounts that members banks have at the Federal Reserve are legally equivalent to paper money. The banks can exchange part of that account balance for paper money, or exchange paper money for that account balance at any time. To settle debts between banks they almost never cart truckloads of cash between each other, but simply ask the federal reserve banks to adjust their balances accordingly. This looks a LOT like the layer 2 money that banks create, but it is layer 1. If RBI works similarly, then it is not really apparent why a wholesale CBDC would have substantial value. Interbank settlement would already occur via balance transfers at the central bank. It is not even remotely clear to me how an "account-based" wholesale CBDC would differ from the status quo at all. The main thing they mention is allowing more conditions to be attached to transactions allowing "programming" the central bank money (presumably in ways similar to "smart contracts"). There is no mention of why that could not simply be done by enhancing the existing systems, but they also point out that it could be a new tech stack from ground up, which suggests that they feel the existing tech stack has flaws. Retail CBDC would be potentially more interesting, but also far more controversial. Nobody really cares about a central bank keeping a close eye on how banks send money to each other, but a retail CBDC is effectively an attempt to replace cash. There are a lot of issues with that, like people want privacy in cash transactions, but there is no way the bank wants create a new means of money laundering or similar. The fact that many plans for retail CBDCs seem to want desperately to adopt as many crypto currency technologies as possible causes lot of worry. Thinks like losing private keys meaning loss of money (and if intermediaries hold keys instead, you better hope they have really good information security.)