The Reserve Bank of India (RBI) is exploring the possibility of issuing a digital version of the Indian Rupee, it said in a booklet on Payment Systems in India between 2010 and 2020, released on January 25. While central banks around the world have begun exploring the possibility of issuing a central bank backed-digital currency (CBDC) or in various stages of rolling out digital fiat currencies, Indian regulators have been skeptical about CBDCs and crypto-currencies.
“Private digital currencies (PDCs) / virtual currencies (VCs) / crypto currencies (CCs) have gained popularity in recent years. In India, the regulators and governments have been sceptical about these currencies and are apprehensive about the associated risks. Nevertheless, RBI is exploring the possibility as to whether there is a need for a digital version of fiat currency and in case there is, then how to operationalise it”—RBI Booklet on Payment Systems in India.
The idea of a Digital Rupee was first proposed by a Finance Ministry committee back in February 2019. “It may be possible to visualise some models of future official digital currencies but as of date it is unclear whether there is clear advantage in the context of India to come up with a official digital currency,” it said. In fact, the RBI said that it had set up inter-departmental group “to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency,” in its annual report for 2017-2018.
When asked about CBDCs back in December 2019, RBI Governor Shaktikanta Das said that it was very early to speak on a central bank issuing digital currencies. “Some discussions are going on. Technology has yet not fully evolved. It is still in very incipient stage of discussions and the RBI we have examined it internally,” Das said. It seems that the RBI now has changed its mind as other central banks race to issue CBDCs.
Unlike crypto-currencies which are issued without a central bank backing and are privately held and distributed, a CBDC is a digital currency which holds the same value as fiat currencies issued by a country’s central bank. According to a January 2020 survey covering 66 central banks by the Bank of International Settlements, 80% of central banks across the world were engaged in research and experimentation of a CBDC. Among the leading central banks of the world, the People’s Bank of China was the first major central bank to announce it would experimenting with creating a CBDC.
Digital Rupee wallets may be the future
While there has been considerable discussions to regulate crypto-currencies and crypto-firms in India, post the Supreme Court verdict in March 2020, neither the RBI, the Securities and Exchange Board of India, or the government have proposed any new regulations. To issue CBDCs, considerable legislative changes would need to take place to enable the RBI to issue a new form of fiat currencies.
A CBDC can take many forms such as issued on blockchain ledger like private crypto-currencies, a demat accounts like in stocks, a specific payments instrument or an account based CBDC. There are three models of issuing CBDCs:
- Direct: issued by a central bank to banks and then onto consumers and the claim on CBDC payments is on the central bank
- Indirect, wherein digital currencies are issued banks to customers and the claim on CBDC payments is on the bank or market players
- Hybrid: market players on-board customers and issue CBDCs, while the claim on payments is on the central bank
In a blogpost in May 2020, former Finance Secretary Subash Chandra Garg, who headed the Finance Ministry committee on virtual currencies, said that private crypto-currencies can never become fiat currencies. “Crypto-currency guys thought that they can create a digital currency using computer codes whose value would depend upon computing power and effort involved in mining of transactions. There is no connection with real economies- production of goods and services and trade therein- and the relative exchange values of 100s of the currencies in the world,” he said.
While the blockchain form of issuing CBDCs can be expensive, Garg suggests that the regulators create a special wallet through which people can receive Digital Rupees. “Digital rupee can be created in a single unit of one rupee. It is easy in digital mode to make payment of any amount in units of one rupee. Demat rupee in digital wallet is our digital rupee- the next generation of rupee. The system of digital rupee does not make any difference in the authority and management of money by the Central Bank” he said.
“The work of getting physical rupee notes printed, stored in currency chests, receiving soiled notes and destroying them etc. off course gets eliminated. The RBI would continue to issue currency in the Issue Department. It will only be digital currency. Rest of the operations in the Banking Department would remain unaffected. The Banks would have to carry much smaller number of currency notes and coins as the system moves towards more and more use of digital currency. Citizens would be able to keep their incomes and extra digital currency notes in their deposit accounts with the banks as usual.” — Subash Chandra Garg