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Industry roundup: 29 December

India’s central bank recommends basic version of central bank digital currency

With the growing uncertainty around cryptocurrency and its regulation, the Reserve Bank of India (RBI), the country’s central bank, said it is inclined to offer a basic central bank digital currency (CBDC) initially and test comprehensively before implementing a more sophisticated version.

"India's progress in payment systems will provide a useful backbone to make a state-of-the-art CBDC available to its citizens and financial institutions," the RBI commented in its report on “Trend and Progress of Banking in India 2020-21.”

“In its basic form, a central bank digital currency (CBDC), provides a safe, robust and convenient alternative to physical cash. In comparison with existing forms of money, it can offer benefits to users in terms of liquidity, scalability, acceptance, ease of transactions with anonymity and faster settlement,” it said, adding the central banks across the globe are deliberating on how to implement CBDCs.

The RBI believes that it is necessary to adopt basic CBDC models initially for minimum impact on monetary policy and the banking system. It has been examining use cases and working out a phased implementation strategy for the introduction of CBDC with little or no disruption.

T Rabi Shankar, the RBI’s deputy governor, has stated that “two types of CBDC are in the works,” wholesale and retail, and that “a lot of work has been done” on the wholesale CBDC, but that “the retail-based CBDC approval is more complicated and it will take some more time.” He also mentioned that “the moment it is ready, whichever is ready first, we will release it for pilot testing.”

The RBI is of the considered opinion that the introduction of CBDCs has the potential to enhance the efficiency of cross-border payments and going forward may provide an alternative to correspondent banks.


China infuses most liquidity into the banking system in two months

China boosted its injection of short-term cash into the financial system to the highest in two months, as demand for liquidity climbed before year-end.

The People’s Bank of China (PBOC), China’s central bank, added US$31 billion (200 billion yuan) worth of cash into the financial system through seven-day reverse repurchase agreements, more than offsetting the 10 billion yuan coming due. The move came after an indicator for short-term borrowing costs soared the most in a year on Monday, a sign of liquidity shortages in the interbank market. The yield on 10-year government bonds fell to 2.795%, the lowest level since June 2020.

“The big injection will help alleviate liquidity pressure,” observed Zhaopeng Xing, senior strategist at Australia and New Zealand Banking Group Ltd. (ANZ). “It is necessary to help financial institutions move cross the year-end smoothly.”

Liquidity conditions in China tend to tighten toward the end of the year, as banks hoard cash to prepare for regulatory checks. Earlier this month, the PBOC reduced the reserve-requirement ratio in an effort to keep cash supply ample and support the nation’s economic recovery from the pandemic. In its quarterly meeting, the central bank pledged to use monetary policy tools more “proactively” to support growth.

The seven-day repo rate had fallen by 15 basis points to 2.27% on Tuesday afternoon, after soaring 52 basis points on Monday. 


Thailand to reschedule central bank digital currency pilot project to late 2022

The Bank of Thailand (BOT), Thailand’s central bank, has announced that it will delay the testing phase of its central bank digital currency (CBDC) until late next year.

Thailand will be taking a slow and steady approach to the implementation of its digital baht. Kasidit Tansanguan, deputy central bank director, BOT, said “Thailand can still take a gradual step in the retail CBDC to ensure efficiency and prudence as it does have a problem with fund transfers or payments as some other countries." He reiterated that the point of a retail CBDC isn’t to compete with cryptocurrency or stablecoins - mediums that the bank doesn’t support as payments given their inherent risks.

The pilot project will see financial institutions and about 10,000 users test the digital currency for deposits, withdrawals and fund transfers.

In a whitepaper published by the BOT in April 2021, the bank explained that it intends to create a CBDC to provide Thai citizens with an “accessible, reliable and safe form of digital currency” citing the transnational nature of existing digital currencies as a problem for tax enforcement, foreign exchange rules and financial stability.

The paper also cites improving cross-border remittances, as well as cracking down on money laundering as secondary reasons for developing a CBDC.

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