The time for introduction of central bank digital currencies (CBDCs) is possibly near, with the Reserve Bank of India (RBI) currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption, according to Deputy Governor T Rabi Sankar.

Referring to countries generally implementing specific purpose CBDCs in the wholesale and retail segments, Sankar observed that going forward, after studying the impact of these models, launch of general purpose CBDCs will be evaluated.

A CBDC is the 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.

Some key issues under examination by the RBI relate to the scope of CBDCs – whether they should be used in retail payments or also in wholesale payments; the underlying technology — whether it should be a distributed ledger or a centralised ledger, for instance, and whether the choice of technology should vary according to use cases, the Deputy Governor said.

Further, the validation mechanism — whether token-based or account-based distribution architecture — whether direct issuance by the RBI or through banks; degree of anonymity etc., are also being examined.

However, conducting pilots in wholesale and retail segments may be a possibility in near future.

Benefits and risks

At a webinar organised by New Delhi-based Vidhi Centre for Legal Policy, Sankar emphasised that introduction of CBDC has the potential to provide significant benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk.

“Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option,” he said.

The Deputy Governor cautioned that there are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits.

He underscored that it would be the RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems.”

Sankar said CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade.

“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; some claims that they are akin to gold clearly seem opportunistic.

“Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. There is no ISSUER. They are not money (certainly not CURRENCY) as the word has come to be understood historically,” he cautioned.