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RBI says it needs to assess cybersecurity risks before rolling out CBDCs

India’s central bank has two types of CBDCs in the works, and the government is preparing a legal framework for them.

The Reserve Bank of India governor Shaktikanta Das believes the central bank needs to safeguard CBDCs (Central Bank Digital Currency) from risks of digital frauds and cybersecurity before rolling them out. He was speaking at a media interaction after announcing RBI’s monetary policy.

Das explained that the central bank had major concerns around fake Indian currency notes a few years ago. “Similar things can also happen when you are launching CBDC,” he asserted. Das said that the RBI will be careful and take preemptive steps to prevent fraud. He also said that the bank recognises the need for a robust system to prevent cyber attacks.

Das’s remarks are an indicator of the direction in which the central bank seems to be heading, and they seem to imply that the central bank may not be rolling out CBDCs anytime soon as it continues to address the risks afflicting digital currencies.

What is the status of the CBDC project at RBI?

RBI Deputy Governor T Rabi Shankar disclosed that the bank is working on two types of CBDCs— wholesale, and retail.

“A lot of work has been done on wholesale account-based CBDCs. The retail side of CBDC is complicated and it will take time. The first side to get ready will be released first for the pilot,” said T Rabi Shankar.

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The central bank had announced that it was working towards a “phased implementation strategy” for the introduction of its CBDC, the Digital Rupee, and examining use cases to ensure that its execution does not cause any disruption in July this year.

What is CBDC? Unlike cryptocurrency or private virtual currency (PVC) which is issued by private entities, a CBDC (same as a fiat currency) is issued by a country’s central bank and is backed by assets such as government securities. It is also exchangeable one-to-one with fiat currency.

Deputy Governor Shankar had said that developing India’s own CBDC can provide citizens with uses that any private VC can provide and which would help in retaining a public preference for the Rupee. “It could also protect the public from the abnormal level of volatility some of these VCs experience,” he said, and avoid their damaging consequences.

What has the Union government revealed in the Parliament?

“…Government has received a proposal from the Reserve Bank of India (RBI) in October, 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form,” the Ministry of Finance had said in response to a question by Indian National Congress MP Adoor Prakash in the winter session of Lok Sabha.

Understanding the benefits of CBDCs

When asked about the purpose of the scheme, the finance ministry wrote that the CBDC will:

  • Reduce dependency on cash.
  • Higher seigniorage due to lower transaction costs (seigniorage is the profit made by a government when issuing currency, calculated as the difference between the face value of coins and production costs).
  • Limit settlement risk.
  • Provide trusted and regulated legal tender-based payments options.
  • Will not have volatility which is normally associated with private cryptocurrencies

“There are also associated risks which need to be carefully evaluated against the potential benefits,” the ministry’s response read.

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