India CBDC: Phased Rollout of Digital Currency Considered

India's Central Bank Considers Digital Currency Launch

A leading official has revealed that the Reserve Bank of India is actively evaluating the introduction of a digital currency. This signifies a definitive move forward, following previous assessments of the concept.

Phased Implementation and Legal Framework

T Rabi Sankar, Deputy Governor of the Reserve Bank of India, stated during a conference that the central bank is contemplating a “phased” rollout of the nation’s digital currency. This implementation will coincide with necessary amendments to India’s foreign exchange regulations and information technology legislation.

Benefits of a Sovereign-Backed Digital Currency

The proposed digital currency, guaranteed by the sovereign, is expected to diminish the nation’s dependence on physical cash. It will also facilitate more affordable and efficient international transactions, and offer protection to citizens against the price fluctuations inherent in private cryptocurrencies.

Timing and Risk Assessment

“The opportune moment for a CBDC [central bank digital currency] is approaching, as every concept requires the right timing,” Sankar explained to attendees at an event hosted by the Vidhi Centre for Legal Policy. He further emphasized that the associated risks have been thoroughly investigated.

Global Leadership in Payment Systems

The central bank’s objective is to ensure that India’s digital currency reinforces the country’s prominent position within global payment infrastructures as the plan progresses.

Global Trend Towards CBDCs

This announcement follows the European Central Bank’s recent decision to initiate a 24-month “investigation phase” which could potentially result in a digital euro by 2025.

China's Digital Yuan Progress

Furthermore, China’s central bank reported that its digital yuan trial had reached a transaction value of $5.3 billion by the end of June.

Increased Focus on Digital Currencies

“Central banks are increasingly prioritizing digital currencies,” Sankar noted. “A CBDC is likely to become a standard tool for most, if not all, central banks worldwide. A carefully considered and nuanced strategy will be developed, incorporating input from stakeholders.” He added that the RBI has been diligently examining the advantages and disadvantages of issuing a sovereign CBDC for an extended period.

Exploring CBDC Models and Use Cases

“We have analyzed specific-purpose CBDCs proposed by various central banks globally, focusing on both wholesale and retail applications. The possibility of launching a general-purpose CBDC for widespread use is under consideration, with the RBI developing a phased introduction strategy. This strategy aims to minimize disruption to India’s existing banking and monetary systems,” he stated. “Piloting programs in both wholesale and retail sectors may be implemented in the near future.”

Stance on Private Cryptocurrencies

Sankar also indicated that the central bank’s position regarding private cryptocurrencies, such as bitcoin, remains unchanged.

Past Recommendations for a Ban

In 2018, a government panel in India recommended a ban on all private cryptocurrencies, proposing penalties of up to 10 years imprisonment for violations. The panel also suggested exploring a digital form of the national fiat currency and its implementation.

RBI's Concerns Regarding Private Cryptocurrencies

At that time, the RBI argued that such a measure was necessary to prevent the isolation of the country’s financial system. The bank also maintained that cryptocurrencies like bitcoin cannot be classified as currencies due to their lack of physical form or governmental endorsement.

Intrinsic Value and Opportunistic Claims

“They lack intrinsic value and are not commodities or claims on commodities; assertions that they are comparable to gold appear opportunistic,” Sankar commented.

Impact on Cryptocurrency Startups

The 2018 notice from the central bank caused significant disruption to numerous local startups and companies involved in cryptocurrency trading. Many were forced to cease operations or shift their focus to different markets.

Supreme Court Ruling and Future Legislation

This proposal was legally challenged by exchanges and traders, who filed a lawsuit with the Supreme Court. Last year, the court ruled in their favor, a decision hailed as “historic.” However, this ruling has not yet altered the underlying policy. The country has signaled its intention to enact legislation prohibiting private cryptocurrencies.

Proposed Legislation and Blockchain Technology

Legislation proposed earlier this year aimed to “prohibit all private cryptocurrencies in India,” while allowing exceptions to foster the development and application of the underlying blockchain technology.