The Reserve Bank of India (RBI) outlined the proposed features and rationale for its upcoming Central Bank Digital Currency (CBDC) in a 51-page note published on October 7.
The country’s central bank aims to raise awareness about the digital central bank currencies that are being developed by a number of central banks across the world and clearly define goals and options as well as the potential upsides and downsides of the Indian digital rupee. .
The paper summarizes the main drivers of the issuance of a digital currency for the Central Bank of India, highlighting trust, security, liquidity, finality of settlement and integrity as key components of a sovereign digital currency.
The main motive for issuing a central bank digital currency in India is to reduce transaction costs associated with handling cash in the country. RBI also claims to improve financial inclusion as well as an increasingly robust, efficient and innovative payment system.
The improvement in cross-border payments and settlements has also been highlighted by the promise of an offline feature for central bank digital currencies, which will be useful in remote locations and areas without fixed power or fixed mobile network access.
The Reserve Bank of India (RBI) has long kept public blockchains and cryptocurrencies on hand, and the paper articulates its consistent view that cryptocurrencies pose a significant risk to Indian consumers due to market volatility.
“These digital assets undermine the financial and macroeconomic stability in India due to their negative impact on the financial sector.”
The Reserve Bank of India (RBI) also expressed concern that the continued spread of cryptocurrencies would reduce its ability to regulate monetary policy and the monetary system, which the central bank believes poses a threat to India’s financial stability.
The CBDC digital rupee is said to have the same benefits as public cryptocurrencies, while “providing consumer protection” while avoiding what it describes as “harmful social and economic consequences.”
The note goes on to summarize the differences between retail and wholesale central bank currencies, with the former serving the public sector while the latter having limited access to financial institutions. The Reserve Bank of India suggested that it might make sense to introduce both forms to the Indian market.
The Reserve Bank of India also touched on the possibility of direct and indirect issuance and management. In the direct version, the RBI will be responsible for managing the entire system, while the indirect model will involve the use of intermediaries such as banks and other payment service providers.
The Reserve Bank of India also indicated that a digital currency based on digital currency would be preferred for retail sale due to its similarity in use to physical money. Account-based CBDC issuance will be considered for wholesale users.
The paper also looks at the potential infrastructure behind the digital rupee and highlights traditional and central databases or distributed ledger technology (blockchain) as two possible options:
“While design choices crystallize in the early stages, technology considerations can remain flexible and open to accommodate changing needs based on the development of aspects of CBDC technology.”
The note also addresses the role of physical currency in providing anonymity, universality, and infinity. Given that digital transactions will leave a mark, the degree of anonymity offered is still being evaluated, while the Reserve Bank of India (RBI) has suggested that reasonable anonymization of low-value transactions such as physical cash could be a “desirable option” for a digital currency banking retailer. .