RBI Sets the Foundation for the Central Bank Digital Currency

The Reserve Bank of India (RBI) has been looking at various use cases of the Central Bank Digital Currency (CBDC) and is working towards implementing a phased release strategy. T Rabi Shankar, the Deputy Governor of the RBI, stated that the regulator had been exploring the upside and downside of CBDC lately, and several pilots were conducted to analyse things better.

For the record, RBI had shared the idea of coming up with a new virtual currency issued by the central bank. This virtual currency can be thought of as an alternative to cash. Unlike cryptocurrencies, the CBDC will be backed by the sovereign reserves of different states and are not volatile.

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CBDC comes with several advantages, such as reduced cash dependency, reduced settlement risk, higher seigniorage due to lower transaction costs, and so on. According to RBI, CBDC can be converted into cash or sovereign-backed deposits.

Once the CBDC is introduced, India will join the other countries that have come up with their own digital currencies, such as China, Russia, and the UK. These countries have designed specific purpose CBDCs in the wholesale and retail segments. India will plan the release of a general-purpose CBDC after studying the impact of these models.

The deputy governor also mentioned that there are risks associated with CBDC. However, those risks are being evaluated carefully against potential benefits. Though CBDCs are not very different from physical currency notes, a proper legal framework is necessary. This may be framed with the Reserve Bank of India Act, 1934 in mind.

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in.