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India’s Digital Currency Implementation Plan
The Reserve Bank of India (RBI) could release a model for the implementation of India’s sovereign digital currency, the Central Bank Digital Currency (CBDC) “by the end of this year”, according to a statement made by RBI deputy governor T Rabi Sankar.
These (CBDC) are extremely evolving technologies and business choices that one has to make, and therefore it’s difficult to put a date, but we should be able to come up with a model in the near future – probably by the end of this year, the RBI deputy governor told journalists at the post-Monetary Policy Committee (MPC) press conference. “We’re evaluating the issue of scope, technology, distribution and validation mechanism, etc.”, he added.
What Is CBDC?
Unlike cryptocurrencies like Bitcoin and Ethereum, CBDC would be a stable digital coin that would be relatively immune to market volatility. These coins would be issued by the RBI and backed by India’s sovereign reserves, not market demand. If implemented, CBDC would appear as a liability (currency in circulation) on the central bank’s balance sheet.
In July this year, Sankar had announced that the RBI was planning a phased implementation strategy for the CBDC, and a pilot for testing a general-purpose digital currency could soon be underway. The deputy governor clarified that the RBI defines CBDC 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,” Sankar had said.
How Will It Be Implemented in India?
The deputy governor of the RBI mentioned that CBDC would have to be rolled out in a phased manner. Before that, the RBI would thoroughly study the use-case for introducing a general-purpose digital coin. Shankar also indicated the need for the RBI to look into cases where specific-purpose CBDCs have been introduced for retail and wholesale segments.
In order to introduce CBDCs in India, a whole range of laws will have to be amended. Acts that will need changes will include sections 24,25,26 of the RBI Act , the Coinage Act, 2011, FEMA 1 1999, Information Technology Act, 2000, among others. Only when the constitutional framework for digital coins is established can CBDCs be introduced in the country.
India’s Stance on Cryptocurrencies
In the past, the RBI and the central government have shared a tough stance on cryptocurrencies. As a result of this, Indian banks were temporarily banned from trading digital coins. In 2019, the government had announced the Cryptocurrency and Regulation of Digital Currency Bill 2021, which aimed to prohibit all private cryptocurrencies in India.
The bill was supposed to be introduced in parliament in the current session. The dominant view now seems to be that there won’t be a blanket ban on cryptocurrencies in India. With the CBDC, the RBI is even taking active steps towards leveraging blockchain for a centralized digital currency. This represents a global trend of the adoption of digital currencies.
According to a survey by the Bank of International Settlements, 86% of global central banks are actively researching CBDCs, while 60% are experimenting with the technology and 14% are launching pilot projects. In China, the digital yuan has already been in circulation in major cities. In July, the European Central Bank launched the digital euro project, approving an investigative phase for the virtual currency. The US Federal Reserve and Bank of England are also looking into CBDCs.
“CBDCs are desirable not just for the benefits they create in payments systems, but also might be necessary to protect the general public in an environment of volatile private virtual currencies,” Sankar had said in his keynote address during a webinar organised by the Vidhi Centre for Legal Policy, New Delhi. “Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. CBDC is likely to be in the arsenal of every central bank going forward.”