Where crypto policy, geopolitics merge
China has already picked a winner. But India has the advantage of a vibrant domestic cryptocurrency ecosystem. Use it
New forms of digital money, whether publicly or privately provided, may become vectors of geostrategy. This is because international payments are a most critical use case of both central bank digital currencies (CBDCs) — electronic forms of central bank money — and private cryptocurrencies. Increasingly cheaper transaction costs, efficient and immediate settlement, and if regulated well, traceability, are just some of the characteristics that are conducive to their globalisation.
However, India will consequently have to guard against new forms of digital “dollarisation” — where domestic cash is replaced by foreign digital currency. An innovation-led approach represents our best chance to do so.
In a 2021 survey of central banks, the Bank for International Settlement (BIS) found that 86% are “actively researching” CBDCs. This includes the Reserve Bank of India (RBI), which plans to roll out a CBDC pilot in 2022. Similarly, private cryptocurrencies that run on blockchain networks are making waves. Conservatively, around 15 million Indians are invested in this market.
CBDCs and private cryptocurrencies are poised to clash. But there are compelling reasons that highlight why CBDCs and private cryptocurrencies should be regarded as complementary rather than competitive.
Foremost among these is that China has taken the lead to develop its CBDC, currently called e-CNY, and is far ahead of India and several developed nations in its deployment. China will make all efforts for e-CNY to become as widely accepted as the dollar, an outcome that may not fit in well with our strategic calculus.
Currently, e-CNY is being piloted in at least nine Chinese cities. While it is primarily used in the domestic retail payments markets, China can quickly reach an understanding with foreign partners to enable interoperability between e-CNY and their retail payments infrastructure. According to BIS, the cross-border availability of CBDCs can further enhance the “already significant network effects for international currencies”. In other words, the wide acceptance of e-CNY can also enhance the status of the underlying currency — the yuan — at the expense of weaker currencies such as the rupee.
Experts have noted that e-CNY represents China’s best hope of skirting sanctions to trade with partners such as North Korea and Iran, because CBDCs effectively disintermediate banks and other financial agencies that may be subject to such prohibitions. President Xi Jinping has also called for China to participate in the setting of international digital currency standards to replace payments systems that are susceptible to American policy pressures.
The silver lining is that India, unlike China, has not banned both the development and use of private cryptocurrencies. In characteristic command-and-control fashion, China has already “picked a winner”. As a result, India is miles ahead of China in the private cryptocurrency ecosystem. The Indian State now has the ability to build useful supervisory models around its vibrant domestic 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) highlights that the demand for new forms of digital money could lead to a flight of bank deposits. This could impact the cost of bank borrowing, and, therefore, tighten credit conditions that will lead to less lending. However, BOE also states that “only when new forms of digital money emerge…will the implications for the wider financial system start to become apparent”. That is, experimentation is key — and India is at liberty to do this at scale by virtue of its burgeoning private cryptocurrency market.
India should look to crypto entrepreneurs as advisers to help it understand risk factors, share knowledge on the development of a domestic CBDC, and offer solutions to automate regulatory compliance. Illustratively, the United States-based crypto giant, Coinbase, which has invested in Indian crypto exchanges that now enjoy unicorn status themselves, is part of an effort that seeks to create a tool that simplifies KYC and anti-money laundering-related compliances for exchanges.
Finally, unlike China, India is also well placed to harness international goodwill. BIS recognises that international cooperation in technical arrangements will be key to the development of digital money. India must actively participate in relevant forums, such as those within G20, to establish common standards to develop a competitive, accountable and secure CBDC ecosystem that is not dominated by e-CNY. Here again, India’s private crypto ecosystem can help the country by serving as fount of technical know-how.
A well-established private domestic market for a product, technological or otherwise, gives a country leverage in global conversations. China missed the bus by shutting its private cryptocurrency sector down. India, in turn, must learn from this mistake and preserve the strategic advantage that its private cryptocurrency ecosystem presents. Doing so will not only help it counter the rise of e-CNY but also help cement its own position as a global leader in a frontier technological space.
Vivan Sharan and Meghna Bal are tech policy experts based in New Delhi
The views expressed are personal