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Comment by ssivark | Hacker News Reader

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/CONC...

[2]: https://brettscott.substack.com/p/casino-chip-cashless-socie...

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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

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.

excellent points. thanks for sharing.

govt / RBI might be able to give a boost to the CBDC by giving some Sec80c benefits. historically that's been a good channel to 'nudge' people into putting money where the govt wants towards.

+1 for the expression "trust calculus" as it seems quite apposite.

CBDC (along with its less august bitcoin sibling) are ultimately questions rather than answers: what are the fundamental building blocks of trust in society (whether analog or digital), how invariant are they under cultural transformations and what might be optimal or at least stable designs (that do no depend on a perpetual pool of "low information" crowds).

UPI has been highly successful.

But please, let’s not credit demonetization with any of it. To the extent demonetization helped, it was an unplanned accident. And it was a result of the fact that the previous administration had begun the Aadhar project (which to its credit the current govt continued and even took credit for).

Demonetization was nothing more than a massive destruction of wealth and growth, done for only one reason. To starve the political opposition of funds over the next few elections.

> 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).

So poor, but well-off for paying for mobile phones/laptops and internet, and educated enough to understand the app interface/language?

> So poor, but well-off for paying for mobile phones/laptops and internet

Yup — physical infrastructure is often mind-bogglingly expensive in both capex and opex (and implicitly subsidized in developed countries, so it appears cheap).

> educated enough to understand the app interface/language?

They might be illiterate, but they’re not stupid. As humans, they’re perfectly capable of learning (especially social learning) when it’s important to them.

Yes! Second hand mobiles are extremely cheap and most people do know how to operate one. The UI is quite easy actually

You don't need CBDC to operate a cashless economy. Digital payments are ubiquitous already and cash is merely an alternative that is available. CBDC changes nothing for end consumers. It is primarily a tool for the central bank to apply monetary policy easily.

The question should be: with the track record of wild debt countries are showing, the Twitter leaked mails shpwing political control behind and the raise in taxes, what makes you think they will do something good?

Besides that: why should I put my effort at the management of people I do not trust so that they do what they deem appropriate without paying for their mistakes? Am I his slave or something?

> Besides that: why should I put my effort at the management of people I do not trust so that they do what they deem appropriate without paying for their mistakes? Am I his slave or something?

Generally you are either directly or indirectly their elector so they are in fact accountable to you. But yeah, that's kind of how democracy works.

I'm personally only supportive of privacy-preserving CBDCs like the Rohan Grey e-cash proposal.

The Twitter files had a lot to say to that response too...

Because in the context of India the digitization of money and centralization of data has been a massive boon to the people.

For example, with the creation of a national identification number (which, thanks to the initial poor security measures has already been hacked), government welfare schemes which involved the distribution of money to people now actually results in the poor benefitting from them, since the money gets deposited in their bank accounts directly. In the past over 80-90% of the money would be stolen by intermediaries.

This is entirely the result of the creation of a massive identity database which by any angle is a security nightmare.

Further, the digitization of money has led to tremendous benefits to the population. Not having to carry around cash greatly reduces the risks of loss or theft. A lot of abuse faced by vendors in the unofficial sector (which is the bulk of the economy) has also reduced because a customer promising to pay cash later because they wouldn’t have it on them, and then either “forgetting” to do so, or delaying it and effectively getting an interest free loan from people who were least able to afford it, is something that has reduced dramatically because the vendor can demand the customer pay them directly using any of the digital means whose receipt they will get confirmation of instantly.

Digital currency has also led to a reduction in fraud and claims of fraud. If a vendor sends a product to a customer with a delivery person, for example, in the past they’d bring cash. This opened up a lot of opportunity for abuse against the largely powerless delivery person where either the customer would not pay enough, and the vendor would blame the delivery person for stealing the money, etc. But now, that simply doesn’t come into play. The customer pays the vendor directly and the vendor sends the delivery person a confirmation and they hand over the product to the customer.

A whole class of exploitation tactics have basically been eliminated.

I get your point and things are nuanced depending on the situation.

But the amount of control this tracking can create is potentially evil. We have to be careful with this.

I'd rather work for less and keep control than doing this. But what this is going to generate is massive govt. control. Worse than before. Not telling about India specifics though.

But, India is so far behind, it may need a little bit of "evil" for a little while to clean up all the layers of intermediary corruption before getting better.

It's already awful to live there for a large part of the population, and they have so little, that the government really has no use tracking them: yes, they re starving, going to work for $5 a month, and sleeping... like, okay they knew that already, maybe having some sort of better grasp on the currency flow could help direct it better.

"Working for less" in India is not the same as in California, just yet.

At the end there is no replacement for responsible people. It is just a matter that with great power comes great responsibility.

I would not bet my safety on more govt. control. Of course my situation is different from many of those people.

At the same time, promoting long-term govt. and state dependence is, IMHO, the wrong choice. As a temporary situation it could be useful, but to promote autonomy when ppl get wealthier, not to make them depend on power.

This is absolutely true. On the flip side, digital currency has also led to much more reliable disbursement of funds to the actual beneficiaries of those funds. This has been a dramatic change.

Western (and even a lot of Indian) media likes to paint a lot of Modi’s support based on his religious discrimination, but in reality that’s only a tiny fraction of the support he enjoys. Most of his support comes from the fact that, for example, even as demonetization has probably led to India’s GDP being far smaller than it would have been otherwise, many poor people are still better off because funds and services that would in the past have largely been eaten up by political and administrative intermediaries actually make it to the people.

And a large part of that is the result of some of the problematic measures like the central identification numbers and the digitization of money.

Here is a bit more on the international efforts for CBDCs

https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm

https://news.ycombinator.com/item?id=33865185

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.)

> 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.

> That should scare us all.

Why?

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-limit...

We already live in a dystopia where transaction sabotage is being compensated with more money to sabotage.

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.

> 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-limit...

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.

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.

Isn't all money still paper behind the scenes, where the banks transfer to one another

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.

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.

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-currenc...

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) ; the M1 money supply (effective cash in circulation, including account balances, etc) is ~$20T - https://tradingeconomics.com/united-states/money-supply-m1 .

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://research.macrosynergy.com/the-global-leverage-proble...

https://www.imf.org/en/Blogs/Articles/2021/03/29/confronting...

https://en.wikipedia.org/wiki/Fractional-reserve_banking

https://en.wikipedia.org/wiki/Money_multiplier

https://www.investopedia.com/terms/l/leverageratio.asp

https://www.investopedia.com/terms/r/rehypothecation.asp

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).

That’s horrifying and I have a hard time imagining that sort of thing happening in any functional democracy.

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...

> 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-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.

> The tone in these papers is universally that this would be desirable for the central bank, but hard for the public to accept.

Yeah, that’s putting it mildly! Isn’t this basically a wealth tax on the middle and working classes?

Yes, on anyone who works to earn a wage rather than owning appreciating assets, basically.

I don't know, maybe it won't happen. But the signs are all pointing in that direction, so I'm kind of resigned to it going that way eventually. Probably it will start by restrictions on large cash transactions, and on owning or carrying large amounts of cash. Then fees for withdrawing paper cash from bank accounts. Perhaps retailers will be allowed to add fees for cash transactions, too. The last step would be deprecating cash altogether, allowing banknotes to be deposited but not withdrawn (withdrawals will be as a CBDC).

Just my guess on how it will go.

>Yes, on anyone who works to earn a wage rather than owning appreciating assets, basically.

People who work for their wage are utterly dependent on the benevolence of the rich who withhold their money from the market. Withholding money from being spent or saved is how you get unemployment and inequality. If anything people who work for money will appreciate that they are being paid and the people they pay will also appreciate it. The only people who won't appreciate are those who already have so much money they don't know what to do with it.

A wealth tax on cash...? Are you kidding me? You can literally avoid it by going to the bank to save your money.

You misunderstand. The bank would be giving you a negative interest rate, so your account balance would always be exponentially decaying.

Cash would allow you to escape this, which is why it would be removed as an option.

>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.

Imagine the horror of having to pay a parking fee instead. Truly horrifying. How are we supposed to pretend that it is ours anymore and extort payments from other people by blocking all the free parking lots?

>This would drive people to spend or invest their money, supporting consumption and inflating asset prices.

You know, in neo classical economics the idea of not spending your money on consumption or investment or saving your money isn't even considered to be something that even happens (by that I mean in neo classics all saving happens at the bank anyway) So if you are against that then you leave central banks no choice other than to create exponentially growing quantities of money and use inflation to devalue all assets instead of only shrinking the type of balance you have the least of. The poor store most of their value in their body and need to trade their body for money that they spend quickly, only the rich who can block their withheld money from being available and thereby extort interest payments from the rest of the economy.

It is like you are arguing that the current system of exponential debt is somehow the height of morality.

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