Digital Currency to Soon Become Reality in India: RBI Working on ‘Phased Introduction’

The Reserve Bank of India (RBI), is moving towards bringing in Central Bank Digital Currency (CBDC). RBI plans on introducing this digital monetary asset in a phase-wise implementation strategy according to the Deputy Governor of RBI, T Rabi Sankar. The CBDC is being introduced in lieu of other private digital assets like cryptocurrency and is in fact a legal and legitimate form of virtual coin that will be on par with its real-world counterpart, according to Sankar. He went on to add that the central bank is framing considerations for the legal framework to be put into place so that the CBDC can coexist with cash and digital payment methods in India.

Having said that, it is important to note what exactly the Central Digital Bank Currency is, how it functions and what the RBI’s stance on it is.

What is a Central Bank Digital Currency?

A CBDC is essentially a legal tender issued by the central bank, as the name suggests. It has the same functional capabilities as a fiat currency and is considered exchangeable in nature with said fiat currency in a one-to-one form. The only notable difference is the form it takes, i.e., a digital form. While it is a digital currency, it is important to differentiate it from existing private digital currencies such as Bitcoin and Ethereum. Private crypto assets such as those have no legal issuers and they cannot be considered as money or currency, whereas the CBDC can be.

The CBDC is the same as any other currency issued by a central bank – a sovereign currency issued but in an electronic form. At the end of the day this form of currency ends up on the Central Bank’s balance sheet as a currency in circulation.

Sankar said, “CBDC will be in the arsenal of most if not all central banks in the world. Setting this up will require careful calibration and a nuanced approach in implementation. Drawing board considerations and stakeholder consultations are important,”

RBI’s Stance on the CBDC

Sankar had mentioned that the RBI is currently looking at ways to launch the digital asset for general purposes on a mass population scale. In doing so legal frameworks would also need to be taken into consideration. Amendments would need to be made to several existing legal outlines and sections such as sections 24, 25 and 26 of the RBI Act as well as to the Coinage Act of 2011. Additionally, changes would be required to the Foreign Exchange Management Act and the Information and Technology Act as well.

“RBI has been exploring the pros and cons of introduction of CBDCs since quite some time,” said Sankar. He went on to add, “Generally, countries have implemented specific-purpose CBDCs in the wholesale and retail segments. Going forward, after studying the impact of these models, launch of general purpose CBDCs shall be evaluated. RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption to India’s banking or monetary systems.”

RBI’s Views Towards Cryptocurrency

Sankar said in a statement that cryptocurrencies such as Bitcoin, do not necessarily fit into the RBI’s definition of ‘currency’. It is in fact this very reason that RBI along with central banks the world over is looking at CBDC as an alternative to the volatile crypto asset in the mainstream economy. The CBDC minimizes the risks as it is not subject to the volatility of the market’s fluctuations.

Sankar cited a study by the Bank of International Settlements (BIS), saying that 86 per cent of central banks in the world are researching CBDC. He added that 60 per cent are currently experimenting with it while 14% of central banks are in the pilot testing phase with CBDC.