The Reserve Bank of India (RBI) is looking at introducing digital currency, called the Central Bank Digital Currency (CBDC) in a phased manner, as per a recent statement from the RBI’s deputy governor. Reports suggest that there is a possibility of testing a digital currency as part of a pilot programme in the near future.
India has been exploring the idea of launching its own digital currency for a while now. The CBDC is a legal tender and a virtual or cryptocurrency that a central bank offers, as a form of alternative currency, based on blockchain technology. A digital currency issued by a central bank is not the same as private crypto such as Bitcoin or Ethereum. The reason is that digital currencies introduced by central banks have sovereignty whereas private cryptocurrencies are subject to volatility.
Why is India exploring a CBDC?
Private digital currencies and cryptocurrencies have been drawing attention in the recent past across the globe, including India. A draft of the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 has been in the spotlight in recent times. The Bill, yet to be taken up for debate in Parliament, proposes to “prohibit” private cryptocurrencies in India although it makes space for some exceptions in order to promote the technology on which such currencies are based.
Earlier, in May this year, the RBI had stated that banks would be allowed to facilitate any trades pertaining to cryptocurrency. It had also stated that the 2018 RBI circular on disallowing such trades by banks would no longer be valid. This is because of the Supreme Court judgement which lifted the ban on cryptocurrency transactions in March 2020. It may be recalled that the RBI had banned banks from supporting any kind of crypto transactions in 2018.
However, ever since the ban has been lifted, cryptocurrencies have been gaining in popularity in India as well. According to data gathered from crypto exchanges, nearly 1.5 crore Indians have invested in cryptocurrencies and hold nearly Rs 15,000 crore. Also, reports suggest that India has more than 350 startups that operate in the crypto and blockchain space.
Framework for implementation
Although India may not be looking at a blanket ban on cryptocurrencies and is looking at regulatory frameworks, the growing popularity of crypto means that the central bank is now taking the concept of a CBDC seriously. However, the setting up of a pilot will need a calibrated approach, according to the RBI deputy governor’s recent statement. This means consultations with all stakeholders involved, following which a possibility of launching pilots in the retail and wholesale segments is on the cards, the RBI official said. The RBI is also assessing the many angles towards launching a CBDC at scale. This includes resolving questions on whether the said currency would be retail or wholesale, or whether it would be distributed by the central bank or other banks as well, apart from the technology to be employed — a centralised or distributed ledger.
A legal framework needs to be in place ahead of launching a central bank digital currency, which may mean amendments to many sections of the RBI Act apart from the Coinage Act and the Foreign Exchange Management Act, among others.
The RBI deputy governor has also listed the many advantages of a CBDC, including lowering cash dependence, cost cutting on currency printing apart from the presence of a well-oiled mechanism for settlement. Also, international systems may turn out to be seamless and cost-effective because time zones would not come into question with the presence of a CBDC.
World’s central banks eyeing CBDCs
Meanwhile, several countries have come up with their own CBDCs. China’s digital yuan trial has touched 34.5 billion yuan in transaction value. Russia has launched CBDC trials with some banks, while Japan, Turkey and the UK are other countries that are exploring the option as well.
The RBI deputy governor, according to recent news reports, has cited a Bank of International Settlements (BIS) and said that 86 per cent of the world’s central banks are studying the concept of CBDC while nearly 60 per cent are in the stage of experimentation. Nearly 14 per cent of the world’s central banks have been pilot testing digital currencies, the official added.
The RBI deputy governor’s recent statement that a phased implementation of a central bank digital currency may be on the cards in the near future. The RBI may launch a pilot to test the various aspects of launching a CBDC, in line with the world’s several central banks’ approach towards sovereign digital currencies.