The Reserve Bank of India (RBI) outlined the proposed features and rationale for its upcoming Central Bank Digital Currency (CBDC) in a 51-page memo published on 7 October.
The country’s central bank aims to raise awareness of the digital central bank currencies being developed by a number of central banks around the world and clearly define the goals and options as well as potential advantages and disadvantages of the Indian digital rupee. .
The article summarizes the main drivers for the issuance of a digital currency for the Central Bank of India, highlighting trust, security, liquidity, final settlement and integrity as key components of a sovereign digital currency.
The main motive for issuing a central bank digital currency in India is to reduce transaction costs associated with managing cash in the country. RBI is also promoting improved financial inclusion as well as an increasingly flexible, efficient and innovative payment system.
The improvement in cross-border payments and settlements has also been highlighted by the promise of an offline function for central banks’ digital currencies, which would be useful in remote locations and areas without fixed power or fixed mobile network access.
The Reserve Bank of India (RBI) has long kept public blockchains and cryptocurrencies accessible, and the paper articulates its consistent view that cryptocurrencies pose a significant risk to Indian consumers due to market volatility.
“These digital assets undermine the financial and macroeconomic stability of India due to their negative impact on the financial sector.”
The Reserve Bank of India (RBI) also expressed concern that continued proliferation of cryptocurrencies will reduce its ability to regulate monetary policy and the monetary system, which the central bank believes poses a threat to India’s financial stability.
CBDC is touted to have the same benefits as public cryptocurrencies, while “providing consumer protection” while avoiding what it describes as “harmful social and economic consequences.”
The note goes on to explain the differences between private and wholesale central bank currencies, with the former serving the public sector while the latter has limited access to financial institutions. The Reserve Bank of India (RBI) suggested that it might make sense to introduce both forms to the Indian market.
The Central Bank of India also touched upon the possibility of direct and indirect issuance and management. With the direct version, the RBI will be responsible for managing the entire system, while the indirect model will involve the use of intermediaries such as banks and other payment service providers.
The Reserve Bank of India also indicated that a digital currency based on digital currency would be preferable for retail use due to its similarity in use to physical money. Account-based CBDC issuance will be considered for wholesale users.
The paper also looks at the potential infrastructure behind the digital rupee and highlights traditional centralized databases or distributed ledger technology (blockchain) as two possible options:
“While design options crystallize in the early stages, technology considerations can remain flexible and open to accommodate changing needs based on the development of aspects of CBD technology.”
