The Reserve Bank of India is currently working towards a “phased implementation strategy” of a Central Bank Digital Currency (CBDC) and may conduct pilot projects to assess the use of the digital currency in wholesale and retail segments in the near future, T Rabi Sankar, Deputy Governor of the central bank said on Thursday.
But before that, the bank is examining some key issues such as its underlying technology, its distribution architecture, that is, if it should be issued directly by the RBI or through banks, and the degree of anonymity that should be afforded to users of the digital currency, Sankar said.
“As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is nigh,” Sankar said at a seminar organised by the public policy think tank Vidhi Centre for Legal Policy.
A CBDC is essentially a form of virtual currency issued by a central bank and is largely stable since it is backed by sovereign reserves. Unlike cryptocurrencies like Bitcoin, a CBDC is not subject to the volatility of the market since it is based on a fiat currency.
Interestingly, Sankar also said that private virtual currencies such as Bitcoin and Ethereum “are not money and certainly not a currency”, affirming the central bank’s stance on cryptocurrencies.
“If these VCs [virtual currencies] gain recognition, national currencies with limited convertibility are likely to come under threat,” he added.
While explaining the possible opportunities presented by CBDC, Sankar noted that a digital currency could have potential risks, especially its implications on the disintermediation of the banking sector and the technological risks.
“CBDC ecosystems may be at similar risk for cyber-attacks as the current payment systems are exposed to…Ensuring high standards of cybersecurity and parallel efforts on financial literacy is therefore essential for any country dealing with CBDC,” he explained.
If India rolls out a digital rupee, it would also require a specific legal framework for its use since the current legal provisions are made keeping in mind currency in paper form, Sankar said.
“There is a need to examine consequential amendments to other Acts like The Coinage Act, 2011, FEMA, 1999, Information Technology Act, 2000 etc. Even though CBDCs will be a primarily technology driven product, it will be desirable to keep the legislation technology neutral to enable coverage of a variety of technology choices,” he said.
It is with noting that India’s neighbour China has already taken a lead in CBDCs after it launched a digital yuan in April, becoming the first major economy to do so. China plans to allow the use of the digital yuan for international use and is designing it to be untethered to the global financial system.
The United States of America meanwhile is mulling launching a digital dollar.
