Is there any need of digital currency given online payments through bank balance

Question

Given talk about launch of retail digital rupee by RBI in India, is there any need for digital currency given online payments through bank balances of individuals/firms already serve the purpose?

Answer 1

There is probably no need for individuals and firms. However, central banks would benefit from this.

There is good overview of this topic in this the Economist article. You can also see more academic overview of this in Sinelnikova-Muryleva 2020, Panetta 2018 or Achord et al (2017). Summary of the main points:

First, CBDC's will allow central banks to implement negative interest rates in the future once they are not just alternative to cash but cash is outright abolished.

Second, CBDC's will give greater control over the economy to the government. Most of illegal activity is cash based. Once cash will be abolished this should in theory hamper illegal activities.

Third once all money is online government will have real time overview of all your transactions which should help with clamping down on any tax evasion.

Fourth, since CBDC wallets can be viewed as a deposits at CB, an argument can be made that it will make traditional banking obsolete, and thus CB will have to worry less about financial sector stability.

This will however not happen immediately, currently CBDC's are being introduced as an alternative to cash or regular transactions, however the ultimate goal is to move to cashless society.

However, I do not think there is much if any direct benefit to regular individuals or firms. I suppose this could reduce costs of banking to individuals which would be beneficial. There will be indirect benefits to the extent that this will make nefarious illegal activities harder and to an extent that negative interest rates will help CBs better combat recessions. On other hand, people living under dictatorship or corrupt governments (such as China) will find it harder to oppose such regimes because it increases the ability for state to do surveillance, and would give officials power not just to freeze your account but all money you have.