A CBDC is a form of virtual currency that is issued by a central bank as an alternative to cash. Unlike cryptocurrencies, CBDCs are backed by the sovereign reserves of nation states and are thus not subject to the same volatility.
The deputy governor said that the RBI’s definition of CBDC is a digital form of sovereign currency that can be converted into cash or sovereign-backed deposits. With this, India joins countries such as China, Russia and the United Kingdom, which have all taken steps towards introducing CBDCs.
The central bank has made several considerations with respect to the scope and legal framework of this proposed CBDC, which will likely co-exist with cash and digital forms of payments, Shankar said in his keynote address to Vidhi Centre for Legal Policy.
“Every idea has to wait for its time, and the time for (India’s) CBDC is near,” said Shankar. “We have carefully evaluated the risks and RBI’s endeavor is that as we move forward, India’s CBDC can reiterate its leadership position in payment systems of the world.
“CBDC will be in the arsenal of most if not all central banks in the world. A calibrated and nuanced approach will be considered at the drawing board as well as with stakeholder consultations,” he added.
Citing a study by the Bank of International Settlements (BIS), Shankar said that 86% of central banks in the world are researching CBDCs, 60% are experimenting with them, and 14% are in the testing phase.
Shankar also said that RBI has closely examined several aspects of launching a general purpose CBDC, including: what it can be used for; the technology that underpins it (distributed or centralised ledger); the validation base (token or account-based); and whether it will be issued only by the central bank or by commercial banks as well.
He said that several enabling legal frameworks would also need to be considered before launching a CBDC. Significantly, these include amendments to sections 24, 25 and 26 of the RBI Act, and provisions of the Coinage Act of 2011, the Foreign Exchange Management Act and the Information Technology Act.
“RBI has been exploring the pros and cons of issuing India’s sovereign CBDC since quite some time,” he said. “We have studied specific-purpose CBDCs proposed by different central banks around the world for wholesale and retail segments. The launch of a general-purpose CBDC for population scale is being considered, and RBI is working towards a phased introduction strategy and examining use cases with little or no disruption of India’s banking and monetary systems,” he said.
There are several benefits of issuing a CBDC in India, he said. These include reduced dependency on cash, lowering of costs of printing cash, and a more robust settlement mechanism.
Another benefit he highlighted was the elimination of “time-zone difference” in foreign exchange transactions, which could foster a cheaper and smoother international settlement system as well.
Interestingly, Shankar added that cryptocurrencies such as Bitcoin don’t fit the RBI’s definition of a currency, and that one reason why central banks around the world are experimenting with CBDCs is that they want to minimise the risk that cryptocurrencies pose to the fiat economy.