India’s central bank, the Reserve Bank of India (RBI), has released a concept note on a proposed central bank digital currency (CBDC).
The concept note discussed key issues such as technology and design options, potential uses of the digital rupee (₹) and issuance mechanisms, among others. RBI will soon begin work on the pilot project.
The memorandum was drafted by the Fintech Department, a department created by the RBI to come up with CBDCs and draft regulations related to cryptocurrency.
The memo also indicated that the authority aims to work step-by-step for different phases of pilots before finally launching the digital currency. He also stressed the need to identify “innovative approaches and compelling use cases that will make central bank digital currency as attractive as cash, if not more so.”
Suggested Design Structures
Centralized digital currency, as a sovereign currency, has unique advantages over central bank money, ie. Trust, Security, Liquidity, Final Settlement and Integrity. Simply put, a central bank digital currency is not a cryptocurrency in the strict sense of the word.
The note also discussed a number of drivers behind the idea of a CBDC in India, such as reducing the operational costs involved in handling physical cash and enhancing financial inclusion. This move also aims to bring flexibility, efficiency and innovation to the current payment system. In addition, increased innovation in cross-border payments is also expected.
More importantly, the note claims that a central bank digital currency will provide the same services as any private virtual currency, without the associated risks.
It should be noted here that the observation was crucial to the design of cryptocurrencies as it aims more to bypass established and regulated brokerage and control arrangements. Because of this, the Reserve Bank of India (RBI) is planning to offer a central bank digital currency that will be similar to all private cryptocurrencies, minus the risks.
There will be two types of CBDCs in India – retail (CBDC-R) and wholesale (CBDC-W). While the former will cater to the private sector, consumers and non-financial businesses, the latter will cater to selected financial institutions.
RBI is studying both token-based and account-based structures for its CBDCs.
Central answer to cryptocurrency
Regarding the anonymous nature of cryptocurrencies, the list states that it remains a challenge because all digital transactions will leave a trace. However, it will still be an important design decision for the project.
Finally, he also stressed the need to create a bank-based digital digital currency that meets AML/CFT (AML/CFT) requirements.
The reluctance of the Reserve Bank of India to have a “private” cryptocurrency in the Indian economy is well known. Like most countries, it was also concluded that there was a need to create a CBD. However, her opposition to “private” cryptocurrencies remains, as evidenced by her repeated calls to ban the asset class.