The Reserve Bank of India (RBI) will soon publish a policy paper detailing its Central Bank Digital Currency (CBDC) or ‘Digital Rupee’ ambitions, RBI Governor Shaktikanta Das said on Thursday during a virtual address on the 185th Foundation Day Celebration of the Bombay Chamber of Commerce. “We do not want to be left behind in this technology revolution that is taking place,” he said.
“On CBDCs, a lot of work is going on internally in the Reserve Bank of India and we will be coming out with some broad guidelines and approach paper very shortly. There are a few issues to be sorted out internally and its very much work in progress,” Das said. The RBI’s guideline and proposed policy paper could address two aspects, the first is on capitalising on the benefits of blockchain technology and the second is the operations of the CBDC, the Governor suggested in his address.
Over the last month the crypto-currency industry in India has been thrown into a tizzy, ever since the government said it would introduce a new law which would ban “private” crypto-currencies, while creating a national digital currency. As very little information about the bill is available, speculation surrounding what the government and RBI is planning has grown over the past few weeks.
Despite routine consultation with the cryptocurrency and blockchain industry over the last year, industry insiders say that the government seems to have drawn the incorrect conclusion that crypto-assets need to be banned for a digital currency to simultaneously exist, as both can exist together and drawing a distinction creates necessary conflict. However, they also believe that the future of cryptocurrency investments in India remains intact, and that it is likely that the CBDC route is one way to make the crypto-asset or currency universe more legitimate and transparent for regulators.
In an interview to CNBC-TV18 on Wednesday Das said that the RBI has major concerns from a “financial stability” point of view. “We have certain major concerns about cryptocurrency. We have communicated them to the government. It is under consideration in the government and I do expect and I think sooner or later, the government will take a call and if required, the Parliament also will consider and decide,” he said. The Governor added that the RBI is working on the technology and procedural side for launching the digital currency.
The Governor said that the proposal to allow retail investors to buy government securities through a direct window was completely separate from its CBDC plans. “I do not want to guess a date, it will be very difficult and not possible for me to give a date, because several loose ends need to be tied up. But it’s receiving our full attention,” he said.
Race to create a digital currency
The Indian government may be pursuing a model similar to China, which banned crypto-currencies in September 2017 prior to starting working on its CBDC or Digital Yuan. However, the Bahamas is the only country in the world to issue CBDCs so far. While South Korea and Brazil plan to develop their respective CBDCs next year, the Bank of Canada, the Federal Reserve, the Bank of England and the Bank of Japan, have each announced they are are evaluating the contours of issuing a CBDC. The European Central Bank says that it will launch a Digital Euro project sometime this year.
Unlike cryptocurrencies which are issued without a central bank backing and are issued and traded on exchanges, a CBDC is a digital currency which holds the same value as fiat currencies issued by a country’s central bank. The value of the CBDC is pegged to the value of the fiat currency. The ‘private’ crypto-currencies include Bitcoin, Ethereum and Ripple, among many others.
While cryptocurrencies can be used as a currency or as a means of exchange/payment, regulators across the world have adopted different approaches. Most regulators around the world treat the majority of crypto-currencies as investment vehicles, like in the case of the Securities and Exchange Commission of the United States. But since Bitcoins can be used as payment instruments in Singapore and Japan, the central bank in each country is in charge of issuing regulations for the use of cryptocurrencies like Bitcoin as a means of exchange.
It is important to note that each cryptocurrency can have several use cases. While Bitcoin can be used as a means of payment, it behaves like a stock and is traded every day for the potential returns on their investment. Other cryptos like Ethereum and Ripple, which are also traded for investment returns, are building blockchain-based infrastructure and tools.
A CBDC can take many forms. It can be issued on blockchain ledger like regular cryptocurrencies, or through a demat account or a specific payment instrument. There can be retail CBDCs, which would be accessible to all types of consumers, or wholesale CBDCs that are meant only for institutions. It can also be interest-bearing or non-interest bearing instruments, the latter would qualify as a ‘stablecoin’ that can be bought and deposited into digital wallets. Consumers and institutions with the digital wallets/accounts can buy regular goods and services with the ‘Digital Rupee’, and as a stablecoin it can be used as a prerequisite for any crypto-currency trading and investments for all market participants.
An interest-bearing CBDC has a monetary policy objective for central banks in addition to being a means of payment. An interest-bearing CBDC can be used to earn an interest rate, akin to a bank deposit. Through a digital interest-bearing currency, the RBI can either pass on interest rate benefits to all consumers or specific beneficiaries directly. It can also reduce or increase the rate offered on the CBDC to increase or decrease the money supply in an economy thereby, controlling inflation. While CBDCs have financial inclusion benefits they can threaten the role banks play in terms of providing deposits and loans and other market instruments.
However, most central banks around the world are pursuing a non-interest bearing variant of the CBDC, as a means to reduce the use of cash and increase transparency and security of transactions by either institutions or consumers depending on the model followed. There are three models of issuing CBDCs:
- Direct: issued by a central bank to banks and then to consumers; the claim on CBDC payments is on the central bank
- Indirect, wherein digital currencies are issued by banks to customer; the claim on CBDC payments is on the bank or market players
- Hybrid: market players on-board customers and issue CBDCs; the claim on payments is on the central bank
MediaNama has prepared a guide on crypto-currency regulations in India, listing the government’s position over the last few years and various policy recommendations; read it here: A complete low-down on crypto-currency regulation in India.
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