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India’s Central Bank Releases Concept Note Ahead of CBDC Pilot

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India’s Central Bank Releases Concept Note Ahead of CBDC Pilot

The Reserve Bank of India (RBI) has published a Concept Note for its digital rupee development project. The document details the objectives, choices, pros, and cons of launching a digital rupee. The apex bank has hinted that its CBDC will be designed as an additional option to the current fiat payment methods in India rather than a complete replacement.

The RBI CBDC Concept Note 

As blockchain-based cryptocurrencies such as Bitcoin (BTC) continue to gain ground in the global financial system, with more and more consumers and merchants now warming up to crypto, traditional central banks are now intensifying efforts to launch digital versions of their fiat currencies in order not to be completely left behind in the digital revolution.

In the latest development, the FinTech Department of the Reserve Bank of India (RBI), an 87-year-old central bank, has released a Concept Note on its central bank digital currency (CBDC) project. The RBI Concept Note details the objectives, choices, benefits and risks of rolling out a digital rupee.

The bank explained:

“The purpose behind the issue of this Concept Note is to create awareness about CBDCs in general and the planned features of the digital Rupee, in particular. The Note also seeks to explain Reserve Bank’s approach towards the introduction of the digital rupee.”

The apex bank says its CBDC project is governed by two key approaches: to formulate a digital rupee that functions exactly like the fiat Indian rupee and to ensure the creation of a new CBDC is as frictionless as possible.

India’s CBDC Motivation 

The RBI notes that while the existing payment systems in the country, such as the Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and others offer consumers an alternative to fiat, the creation of a digital rupee will unlock much more benefits for residents and foster financial inclusion.

The bank added:

“CBDC, being a sovereign currency, holds unique advantages of central bank money viz. trust, safety, liquidity, settlement finality and integrity. The key motivations for exploring the issuance of CBDC in India among others include reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency, and innovation in the payments system, adding efficiency to the settlement system, boosting innovation in payments space and providing the public with uses that any private virtual currencies can provide, without the associated risks.”

In the 51-page document, the RBI also talked about the various CBDC design choices,  and technology considerations, making it clear that its CBDC will adopt a cryptographic system that’s safer than existing payment infrastructure and will be quantum resistant.

Furthermore, the apex bank has revealed that its digital rupee rollout will adopt a phased implementation strategy, with several pilot tests to be conducted before a final launch of its CBDC, to ensure there are no disruptions.

Depending on the various use cases, multiple technological options shall be tested and based on the outcomes, the final architecture shall be decided. As per recommendations of the internal Working Group (WG) set up by the RBI in October 2020, RBI is exploring the option of implementing account-based CBDC in the wholesale segment and token-based CBDC in the retail segment vide a graded approach,” reads a section of the document.

Since introducing a 30 percent capital gain tax on crypto in April 2022, cryptocurrency trading volume has crashed greatly in the country. With the RBI now making progress in its CBDC development, it remains to be seen whether the digital rupee will be able to gain significant adoption by the Indian masses.