Image source: Hindustan Times
India recently announced its intention to test a national cryptocurrency with the support of the Central Bank of India.
According to a paper published by the Reserve Bank of India, they have come up with a phased pilot of their version of a central bank digital currency.
The proposal
The Central Bank of India has outlined its vision for the e-rupee, a digital version of the rupee.
The proposal, or concept note, explains the rationale for launching a central bank digital currency, or CBDC, and how it would be tested at different stages.
Central banks around the world have shown increased interest in CBDC as an alternative to physical cash.
The RBI named China, which is testing its own version of a CBDC, among 16 other countries, as the driver of its advance.
The paper reads:
“Currently, we are at the forefront of a watershed movement in the evolution of currency that will decisively change the very nature of money and its functions.”
“CBDCs are being seen as a promising invention and as the next step in the evolutionary progression of sovereign currency.”
Co-existing with paper money
The RBI is in the process of launching the e-rupee in limited test runs.
They plan to implement it as another form of currency that will be issued alongside paper money.
According to the document, e-rupees will also be an alternative to cryptocurrencies.
However, the central bank said the rampant use of cryptocurrency poses a risk to India’s financial and macroeconomic stability.
It reduces the government’s ability to set and regulate monetary policy, making CBDC a necessity.
“CBDCs will provide the public with [the] benefits of virtual currencies while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies,” said the RBI.
CBDC
The central bank is also considering releasing two versions of the CBDC.
One would be used by people for retail payments, while the other would be used for the settlement of transfers between banks and wholesale transactions.
According to the RBI, a CBDC could make payments more efficient, robust, and trusted.
The RBI acknowledged that a CBDC would be desirable for small transactions to be as anonymous as with cash.
However, it also said providing privacy presents a challenge.
The central bank wrote:
“The potential for [an] anonymous digital currency to facilitate [a] shadow-economy and illegal transactions makes it highly unlikely that any CBDC would be designed to fully match the levels of anonymity and privacy currently available with physical cash.”
Rollout and debates
The Indian government announced plans to launch a CBDC in February, saying the technology would give a significant boost to the country’s economy.
India is likely feeling pressure from China’s ever-growing adoption of CBDCs.
China’s CBDC has also sparked debate among US lawmakers over whether the dollar’s supremacy as the world’s reserve currency is at stake.
In June, Federal Reserve Chairman Jerome Powell said Congress would eventually receive guidance from the Federal Reserve on issuing a CBDC.
The Fed struggled with the prospect of a digital dollar in 2017.
“I think it’s something we really need to explore as a country,” said Powell.
“It’s a very important potential financial innovation that will affect all Americans.”
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