The Reserve Bank of India which is India’s central bank is working on launching its own Central Bank Digital Currency (CBDC), the Digital Rupee in a phased manner.
RBI deputy governor T Rabi Sankar speaking at a webinar at the Vidhi Centre for Legal Policy said that the central bank is working on a pilot project that will be launched soon for the digital rupee.
The CBDC is being launched looking at the advent of cryptocurrencies, which is expected to damage the current monetary system and if not tackled properly will have grave consequences, Shankar emphasized.
Changes in legal frameworks
In order to launch its own CBDC, the RBI will have to make several amendments to its RBI Act section 24, 25, and 26 as well as provisions of the Coinage Act of 2011, the Foreign Exchange Management Act and the Information and Technology Act, the deputy governor underlined.
Another Tori4Town: Nigeria Government Will Launch Digital Currency – CBN
The central bank has already started working on the framework so that CBDC can coexist alongside cash and current digital forms of payments.
India joins China, Russia & the UK mulling CBDC
After this announcement, India has officially joined the list of nations that are working to launch their own CBDC, which include China, Russia, the UK, Sweden, and many others.
Shankar also said that according to a Bank of International Settlements (BIS) study, 86% of central banks in the world are researching CBDC while 60% are experimenting with it. As much as 14% of central banks are in the pilot testing phase.
Digital Rupee as legal tender
Shankar further stated that the digital rupee will be defined as a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.
The digital rupee will be backed by sovereign reserves of the country and the aim is to have the value of these digital coins not be subjected to volatile market fluctuations. This is in contrast to decentralized crypto assets like Bitcoin or Ethereum, which are highly volatile in price and witness huge trading volume on a daily basis worldwide.
Alleged benefits of Digital Rupee
Explaining several benefits of a CBDC, Shankar said that CBDC will help reduce dependency on cash while encouraging savings on the cost of printing currency as well as a more robust and secure settlement mechanism.
CBDC will also eliminate the time zone difference in foreign exchange transactions, which could foster a cheaper and smoother international settlement system. This he argued, would minimize the risks of cryptocurrencies on the real economy.
It is to be noted that RBI has been exploring the introduction of CBDC for the past few years. It is weighing the pros and cons of the introduction of CBDCs and studying countries that are about to implement specific-purpose CBDCs in the wholesale and retail segments.
Still studying CBDC globally
Financial experts believe that after studying it, RBI is working towards a phased implementation strategy and examining use cases that could be implemented with little or no disruption to India’s banking or monetary systems.
RBI is yet to decide, whether the digital rupee technology will be based on a distributed ledger or centralized ledger, whether it will be in a form of token or account-based system, and whether it will be distributed by the central bank or by individual banks.
CBDC is issued by a country’s central bank, which is backed by assets such as government securities and totally centralized. This is unlike cryptocurrencies which are issued by private entities and are primarily based on decentralized models, often community-driven with no third party involvement.