Owing to rapid changes in the payment industry, the Reserve Bank of India (RBI) is exploring the possibility to introduce a central bank digital currency.
The central bank has constituted an inter-departmental group to explore the feasibility and desirability, said the RBI in its Annual Report 2017-18.
The development is termed as a measure to fight the rising cost of managing paper currency. This year, printing paper notes cost was Rs 636 crore, as per an RTI response.
The cryptocurrency ecosystem may affect the existing payment and settlement system which could, in turn, influence the transmission of monetary policy. Central banks around the world to explore the option of introducing fiat digital currencies added the report.
Furthermore, it marked that distributed ledger technology (DLT) used in digital currency holds significant future economic benefits in payment space.
Indian government and the central bank have kept a close watch on cryptocurrency ever since it hogged limelight last year.
RBI issued a warning against the trade of cryptocurrency.
In April 2018, RBI barred its regulated entities from dealing in cryptocurrency. The RBI through its circular titled ‘Prohibition on Dealing in Virtual Currencies’, asked banks, e-wallets, and payment gateway providers to withdraw support for cryptocurrency exchanges and other businesses dealing with VCs in India.
The announcement created panic in the Indian trading market. It also reportedly led to falling down in prices of Bitcoin, Ethereum, and Litecoin.
Many crypto traders approached the Court after the move. In July, the SC had also declined to offer relief on the RBI circular, declaring crypto trading illegal.
Cryptocurrency is a digital means of payment that depends predominantly on cryptography and DLT such as the blockchain. A blockchain is a continuous ledger in which transactions are stored as blocks and linked using cryptography.
Cryptocurrency is often allotted through initial coin offerings (ICOs), which are used as a means of raising capital through crowdfunding.
Its limited supply makes it highly volatile exchange.