India’s Central Bank, The Reserve Bank Of India (RBI), is planning to launch a central bank digital currency (CBDC) to “reduce the use of cash and protect citizens from the volatility of cryptocurrencies.”
Deputy Governor T. Rabi Sankar said a CBDC would reduce the use of cash and protect citizens from the volatility of cryptocurrencies.
CBDC or central bank digital currency is a digital version of a country’s fiat currency, issued by the central bank of the country.
In January, RBI said it is exploring the possibility as to whether there is a need for CBDC, and in case there is, then how to operationalize it. Now it has planned to launch a series of pilot programs for a proposed CBDC.
The deputy governor said in a speech Thursday that the central bank was weighing a “phased introduction” of a digital rupee to allow time for required legal changes to the country’s foreign-exchange rules. A pilot to test a general-purpose digital currency is a possibility in the near future, he said.
The RBI published a report in February which stated that digital currency can increase financial inclusion and transparency but may take away low-costs deposits from banks with impacts on the economy. However, it poses a risk of disintermediation of the banking system, the report said.
“CBDC will be in the arsenal of most if not all central banks in the world. Setting this up will require careful calibration and a nuanced approach in implementation. Drawing board considerations and stakeholder consultations are important,” he said.
The Reserve Bank of India is planning to conduct CBDC pilots in wholesale and retail segments in the near future.
The announcement has come at a time when global demand for cryptocurrency is growing and more number of countries are contemplating central bank digital currency (CBDC). RBI move can be a significant step that could lead to the issuance of a digital rupee.
This is a significant development as Indian banking regulator has previously shown intent to ban cryptocurrencies outright, the mood has changed somewhat in recent months with signs of country taking a more lenient approach and seeking to regulate the crypto market.
Competition in the CBDC space has started intensifying across the world. In 2020, Bahamas launched the first CBDC, the Sand Dollar. Sand Dollar is now a national digital currency for the region, holding the same value as the Bahamian dollar. Amongst large countries, China has been working towards a digital yuan since 2014. The People’s Bank of China is conducting one of the most advanced CBDC trial in the world.
The Governing Council of the European Central Bank (ECB) last week announced that they will be moving into the next phase of digital euro project.
In July, another CBDC related announcement came from New Zealand. The Reserve Bank Of New Zealand, Te Pūtea Matua, announced that it will do extensive public consultations on how the New Zealanders wish to pay and save in the future. The public consultation will include topics from cash payment to online payment to cryptocurrency, Bitcoin, Stablecoin and most importantly CBDC.
