Reserve Bank of India (RBI), India’s central banking authority, defines CBDC as “the legal tender issued by a central bank in digital form.” However, it differs from the existing digital money in the country -a CBDC is the liability of the Reserve Bank, not of a commercial bank.
According to a brief press note made available by the Ministry of Finance on December 12th, 2022, the RBI has launched CBDC pilots in both the Wholesale and Retail segments.
Launched on November 1st, 2022, this segment of the CBDC pilot aims to facilitate settlements of secondary market transactions in government securities. The goal is to increase the efficiency of the interbank market.
The authorities believe that settlement in central bank money would reduce transaction costs. It would be better positioned to pre-empt the need for settlement guarantee infrastructure or collateral to mitigate settlement risk.
Launched a month later, the retail version comes in the form of a digital token, representing legal tender. The issue denominations of these tokens remain the same as the paper currency and coins. Financial intermediaries, such as banks, can distribute it. The user must have a digital wallet issued by the respective bank.
In the Digital Rupee-Retail pilot project, transactions can happen the same way as the legal tender: person to person (P2P) and Person to Merchant (P2M). It will come with other legacy tender qualities/advantages relating to trust, safety, and settlement finality. Although it will not be eligible to earn interest, one can convert it to bank deposits or other forms of money.
The Digital Rupee - Retail project started with a closed user group (CUG) as its first set of participating customers and merchants. RBI has named eight banks for phase-wise participation in the retail pilot project.
These banks include the State Bank of India, the ICICI Bank, the Yes Bank, and the IDFC bank in the first phase and the Bank of Baroda, Union Bank of India, the HDFC Bank, and the Kotak Mahindra Bank in the second one.
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According to mid-January reports compiled by the Indian State-owned banks, trades worth INR7,140 Crores (more than US$850 million) were settled in November 2022 alone.
The Reserve Bank of India, while preparing the concept note on its CBDC project, looked carefully at use cases available globally to understand the benefits of a digital currency.
For instance, the RBI considered CBDCs as a means to restrict the excessive physical movement of cash and as a better option to private virtual currency.
The RBI believes the CBDC could be a preferred financial instrument for many in the country. It has an Index for measuring people’s inclination towards digital payments, active since 2018, known as the RBI-DPI index.
The RBI-DPI index, which had a value of 100 in March 2018, increased to 349.30 in March 2022, a growth of almost 3.5 times in four years. This indicates that people’s growing interest in making digital payments was a reason for the RBI to launch its CBDC pilot.
While experts see user behavior as the key to the CBDC program’s success, there is a lot that the country can do to ramp up adoption.
In a country like India, where a significant number of the population lives in rural areas, creating awareness about the benefits of CBDC should be crucial. The rural payment infrastructure must also support sound and speedy internet networks.
The CBDC, wholesale or retail, must fulfill some unique user needs that legacy currency can not fulfill. Those who have already adopted it must be equipped with offline payment facilities and should not worry about their data being breached.
Only time will tell whether these efforts will lead to a paced-up adoption.
On the crypto front, at one point, India was among the top five countries in terms of adoption. However, several anti-crypto measures, including a 30% tax on crypto profits, no way to offset losses from one cryptocurrency to another, and 1% GST on each crypto transaction, dealt a massive blow to the local crypto ecosystem.
Recently, the RBI governor called cryptocurrencies akin to gambling, which shows that the Central Bank is against the proliferation of private digital assets in the country. It also believes the growing use of cryptocurrencies can lead to the dollarization of the economy and has urged the Indian government to ban them.
So far, the government hasn’t banned crypto or regulated them despite introducing a bill for a potential ban on private virtual currencies in 2021. However, the bill was never taken up for debate.
What must be the reason behind the sudden change of heart? After studying cryptocurrencies and their underlying blockchain technology, the government realized that the borderless nature of digital assets requires global cooperation to enforce a ban or even regulate them under any specific framework.
Finally, with India taking over the G20 presidency, the country saw an opportunity to initiate a global discussion on crypto regulations and build a consensus.