Former RBI deputy governor flags potential privacy issues for CBDCs

The Central Bank Digital Currency has been touted as a digital alternative to cash, but privacy concerns persist on digital payments

Updated - March 15, 2024 04:34 pm IST - NEW DELHI

A Reserve Bank of India (RBI) logo is seen inside its headquarters in Mumbai, India.

A Reserve Bank of India (RBI) logo is seen inside its headquarters in Mumbai, India. | Photo Credit: REUTERS

India’s Central Bank Digital Currency (CBDC), known as the Digital Rupee, could entail resistance on civil rights grounds due to transactions being traceable, former Reserve Bank of India deputy governor Rama Subramaniam Gandhi said on Thursday at the Asia Pacific E-Commerce Policy Summit here. India’s CBDC, the Digital Rupee, is being piloted with a few banks. RBI officials have described the CBDC as a way of making sure that funds are used for a specific purpose, while substituting cash as a payment method.

Mr. Gandhi was moderating a discussion on emerging payment technologies in Asia Pacific. “There have been hopes that CBDC will be an answer for the dilemma of confidence and convenience; but it has equally raised questions on privacy, data protection. In the legal community and the civil rights community, there is hesitation to support CBDCs, because trackability of [transactional] information will still be available,” Mr. Gandhi said, directing a question to a panellist on the subject.

CBDCs, which are being tested in limited networks with certain banks, have been presented as a fiat alternative to cryptocurrencies, which the RBI has sought to ban in the past (the Supreme Court set aside the prohibition). Other current and former RBI officials have acknowledged potential privacy concerns with CBDCs, such as deputy governor T. Rabi Shankar and former governor D. Subbarao. Critics have pointed to the inherent requirement of leaving a digital trail for transactions to occur, while cash entails no such risks.

Current governor Shaktikanta Das dismissed these concerns, insisting that even though CBDCs would be used for digital payments, banks would have limited visibility into transactions, much like cash. Mr. Shankar indicated in December 2022 that the central bank would look into solutions.

Cash dominance

Sudhakar Kaza, who was managing director at the Bharatiya Reserve Bank Note Mudran, said that even as digital payment volumes have grown, this has ironically led to a surge in cash payments too. The reason cash use has increased in India is “because of digital steps we have taken — direct benefit transfers are reaching people’s accounts, but they’re withdrawing cash from those accounts to make payments,” he said.

“In 2016, we got an impression that cash would vanish,” Mr. Kaza said. “But what actually happened was … the ₹17 trillion in value in cash in India is now ₹34 trillion.”

“With cash, there’s anonymity and no audit trail left for anybody to follow,” Mr. Kaza added, citing a survey in Japan that highlighted digital payment hesitation in Japan due to concerns of data leaks. He pointed out that while digital payments are measured by the flow of transactions, cash could only be accounted for by issued currency, meaning that every currency note is not being counted for each transaction the way digital payments are tracked.

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