In my article “Headwinds on Digital Currency”, published in “Business Economics” back in October 2021, I wrote about the RBI’s thought process on the creation of the Central Bank Digital Currency (CBDC), India’s own “E Rupee” (having the symbol “e`”). Almost a year after, the RBI has recently released a concept note in this regard. The purpose behind the issue of this concept note is to create awareness about CBDC in general and the planned features of the digital Rupee, in particular.
Primarily the creation of a CBDC got traction on the backdrop of the cryptocurrencies making a large-scale penetration in the investment horizon of the country. Being an unregulated currency, which is created out of a machine algorithm and does not have any underlying supportive asset to determine its intrinsic value, the apex bank issued repeated advisories to the general public about the risk involved in holding positions.
These digital assets are potentially risky not only because of the volatility of its valuation which is largely speculative but also it may undermine the country’s financial and macroeconomic stability because of their negative consequences for the financial sector. Further, a wider proliferation of cryptocurrencies has the potential to diminish monetary authorities’ capacity to determine and regulate monetary policy and the monetary system of the country which could pose serious challenges to the stability of the financial ecosystem.
Another aspect that offered additional fillip to CBDC is the coming of age of the digital payment front where the country has made an impressive progress. Various payment platforms and channels, since the last 20 years, have transformed the payment scenario and the convenience of these payment systems ensured rapid acceptance as they provided consumers an alternative to the use of cash and paper for making payments. Needless to mention that technology has played an important role.
In this backdrop, the country is expected to accept an electronic currency which will have at par valuation with the fiat currency issued. As a precursor, in November 2017, a High Level Inter-ministerial committee was constituted under the chairmanship of the Secretary, Department of Economic Affairs (DEA), Ministry of Finance, Government of India (GoI) to examine the policy and legal
framework for regulation of virtual / crypto currencies and recommend appropriate measures to address concerns arising from their use. The committee had recommended the introduction of CBDCs as a digital form of sovereign currency in India. In between, the pandemic had written a new chapter during 2020 and 2021 which in a way, accentuated the effort and goal set forth earlier as far as electronic payment and CBDC is concerned. The RBI DPI Index clearly depicts this.
Period RBI-DPI Index
March 2018 (Base) 100
March 2019 153.47
September 2019 173.49
March 2020 207.84
September 2020 217.74
March 2021 270.59
September 2021 304.06
March 2022 349.30
The Government of India announced the launch of the Digital Rupee) from FY 2022-23 onwards in the Union Budget placed in the Parliament on February 01, 2022. In the budget announcement it was stated that the introduction of CBDC will give a big boost to the digital economy. The broad objectives to be achieved by the introduction of CBDC using blockchain and other technologies as a ‘more efficient and cheaper currency management system’ were also laid down in the budget.
In the international perspective CBDC has already drawn significant attention primarily because of the operational ease. To a central bank the issuing cost of a unit of CBDC is much lower than a paper or metal currency where the printing, minting, storage, and transportation cost are all add-ons. As of July 2022, there are 105 countries in the process of exploring CBDC, a number that covers 95% of global Gross Domestic Product (GDP). 10 countries have launched a CBDC while 17 other countries, including major economies like China and South Korea, are in the pilot stage and preparing for possible launches.
However, the implementation of the CBDC is going to be a path breaking one. At the operational level, RBI must provide for wide changes in the RBI Act 1934 to include Digital Currency in its purview as a sovereign currency. Based on the usage and the functions performed by the CBDC and considering the different levels of accessibility, CBDC can be demarcated into two broad types viz. general purpose (retail) (CBDC-R) and wholesale (CBDC-W). CBDC-R is potentially available for use by all private sector, non-financial consumers, and businesses. In contrast, wholesale CBDCs are designed for restricted access by financial institutions. CBDC-W could be used for improving the efficiency of interbank payments or securities settlement. Now there might be a question as to why another digital currency be created while several other payment products ranging from RTGS, NEFT to UPI etc. are available which allow seamless electronic transfer of funds. The introduction of CBDC-R will provide a safe, central bank instrument with direct access to the central bank money for payment and settlement. It will also have an advantage as an alternative medium for making digital payments in case of operational and/or technical problems leading to disruption in other payment system infrastructures.
The concept note elaborated on three different models of CBDC, Direct CBDC Model where the central bank will be responsible. In this model, RBI operates the retail ledger and therefore its server is involved in all payments. In the “indirect CBDC” model, consumers would hold their CBDC in an account/ wallet with a bank, or service provider. The obligation to provide CBDC on demand would fall on the intermediary rather than the central bank. In the hybrid model, a direct claim on the central bank is combined with a private sector messaging layer which means commercial intermediaries (payment service providers) provide retail services to end users, but the central bank retains a ledger of retail transactions.
Finally, are we ready for the 2022-23 launch of e` as envisaged by the finance minister in her budget speech? Answer to this is not a binary as there exists hard work in terms of building CBDC prototype, getting the right infrastructure, change in legal framework and buy-in by various stakeholders.
To conclude, the RBI note indicates that “while the intent of CBDC and the expected benefits are well understood, it is important to identify innovative methods and compelling use cases that will make CBDC as attractive as cash, if not more.”