“Every idea has to wait for its time. Perhaps the time for CBDC is nigh,” Sankar said. “It would be 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.”
The central bank is framing several considerations on the scope and legal framework of the proposed CBDC that will likely coexist with cash and digital forms of payments, Sankar said in a virtual keynote address at the Vidhi Centre for Legal Policy.
“CBDC will be in the arsenal of most if not all central banks in the world. Setting this up will require careful calibration and a nuanced approach in implementation. Drawing board considerations and stakeholder consultations are important,” he said. “However, conducting pilots in wholesale and retail segments may be a possibility in near future.”
A CBDC is a form of virtual currency or cryptocurrency that is issued by a central bank as an alternative to its currency. These are largely stable coins backed by sovereign reserves and, unlike private crypto assets like Bitcoin or Ethereum, the value of these digital coins is not subject to volatile market fluctuations.
The deputy governor said that the RBI defines CBDC as a 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,” Sankar said.
With this, India joins the likes of China, Russia and the UK among major economies evaluating the issuance of their own digital currency.
Citing a study by the Bank of International Settlements (BIS), Shankar said that 86% of central banks in the world are researching CBDC while 60% are experimenting with it. As much as 14% of central banks are in the pilot testing phase.
Sankar said the RBI is also closely examining several aspects of launching a general purpose CBDC at population scale. This includes scope–whether retail or wholesale; technology–distributed ledger or centralized ledger; validation base–token or account-based system; and distribution format–issued directly by the central bank or by banks.
He said that for launching a CBDC, an enabling legal framework would also need to be considered. This will include amendments to several sections – 24,25,26 – of the RBI Act as well as provisions of the Coinage Act of 2011, the Foreign Exchange Management Act and the Information and Technology Act.
“RBI has been exploring the pros and cons of introduction of CBDCs since quite some time,” said Sankar. “Generally, countries have implemented specific-purpose CBDCs in the wholesale and retail segments. Going forward, after studying the impact of these models, launch of general purpose CBDCs shall be evaluated. RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption to India’s banking or monetary systems.”
There are several benefits to a CBDC, he said. These include a reduced dependence on cash, savings on the cost of printing currency as well as a more robust settlement mechanism.
Another benefit highlighted by Sankar was the elimination of the “time zone difference” in foreign exchange transactions, which could foster a cheaper and smoother international settlement system.
Interestingly, Shankar also added that private virtual currencies like Bitcoin don’t fit RBI’s definition of currency and one of the factors driving central banks around the world including India to experiment with CBDC is to minimise the risks of cryptocurrency on the real economy.