The Reserve Bank of India (RBI) will soon commence pilot launches of Central Bank Digital Currency (CBDC), referred to as Digital Rupee (e₹), for specific use cases.
The move towards CBDC issuance comes in the backdrop of rapid mushrooming of private cryptocurrencies, whose inherent design is more geared to bypass the established and regulated intermediation and control arrangements.
In its concept note on CBDC, RBI said the e₹ will provide an additional option to the currently available forms of money. CBDC is legal tender issued by a central bank in a digital form.
The central bank observed that its approach to CBDC is governed by two basic considerations – to create a digital Rupee that is as close as possible to a paper currency and to manage the process of introducing digital Rupee in a seamless manner.
Retail CBDC (CBDC-R) would be potentially available for use by all — private sector, non-financial consumers and businesses while wholesale CBDC (CBDC-W) is designed for restricted access to select financial institutions.
While CBDC-W is intended for the settlement of interbank transfers and related wholesale transactions, CBDC-R is an electronic version of cash primarily meant for retail transactions.
RBI said a token-based CBDC (which is a bearer instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them) is viewed as a preferred mode for CBDC-R as it would be closer to physical cash.
Account-based CBDC (which requires maintenance of record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances) may be considered for CBDC-W.
Also considering that physical cash does not carry any interest, it would be more logical to offer non-interest bearing CBDCs.
RBI underscored that the key motivations for exploring the issuance of CBDC in India among others include reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency, and innovation in payments system, adding efficiency to the settlement system, boosting innovation in cross-border payments space.
Further, CBDC will provide public with uses that any private virtual currencies can provide, without the associated risks.
The use of offline feature in CBDC would also be beneficial in remote locations and offer availability and resilience benefits when electrical power or mobile network is not available.
RBI observed that private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value, it added.
“The rapid mushrooming of private cryptocurrencies in the last few years has attempted to challenge the fundamental notion of money as we know it. ...the inherent design of cryptocurrencies is more geared to bypass the established and regulated intermediation and control arrangements that play a crucial role of ensuring integrity and stability of monetary and financial eco-system,” per the note.