The Reserve Bank of India has announced plans on a phased introduction of a central bank digital currency and will put forth a final design after it has conducted large scale pilot projects.
The bank is exploring the option of implementation of an account-based central bank digital currency or CBDC for the wholesale segment and token-based currency for the retail sector, it said in a paper released on 7 October. The digital currency will be referred to as the e-rupee and will provide an additional option to all the available forms of money.
Cash-dependent India is joining countries including China in pushing forward with digital versions of their currencies as they look to harness new technologies to make transactions and payments more efficient. The country’s finance minister said the RBI would launch the digital currency in 2022.
As the paper announced, there are multiple compelling motivations for the introduction of CBDCs, and the RBI is currently engaged in working towards a phased implementation strategy, going step by step through various stages of pilots followed by the final launch. The RBI will soon kick off a limited pilot launch for the e-rupee.
CBDC holds a lot of promises by way of ensuring transparency, as the bank sees it, and low cost of operation among other benefits and the potential to expand the existing payment systems to address the needs of a wider category of users. In the note, the RBI acknowledged that privacy and data protection were a matter of concern when it comes to designing CBDCs.
They acknowledge that ensuring anonymity for a digital currency particularly represents a challenge, as all digital transactions leave a trail. The degree of anonymity would be a key design decision for any CBDC and there has been significant debate on this issue, as representatives say.
The RBI acknowledges India’s love for crypto by saying that CBDCs will provide the public with the benefits and features of crypto without the associated risks. India has had a hot and cold relationship with crypto assets. In 2018 the RBI had cut crypto startups from the country’s payment network and earlier in 2022 India announced a new crypto tax regime, under which a 1% transactional tax has decimated volumes on crypto exchanges reducing them by over 90% since the start of the year.
The move towards the implementation of a central bank digital currency appears to have come fast in this context. It was only in September when the Reserve Bank of India consulted with public sector banks and fintechs such as FIS to test out a central bank digital currency.
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