The Reserve Bank of India, like some of its global peers, has embarked on a long journey to launch a digital currency. And wisely, in line with the introduction of digital assets, the central bank has decided to carry out pilot projects to assess appetite or acceptance for the digital form of the rupee, rather than be in a hurry – if only to keep up with the government. Budget proposal this year to launch a Central Bank Digital Currency (CBDC).
In its concept note on CBDCs released on Friday, the RBI, while announcing its plan for a limited pilot launch of electronic or e-rupee, said it would require detailed planning in terms of scope, cost and timelines to ensure the same. Timely rollout of various phases of CBDC introduction. This will essentially mean experimenting with the wholesale segment – industry and trade – to assess operational efficiency and acceptability before moving to the challenging segment, retail, later. Major central banks have followed this glide path, reflecting what US Federal Reserve Chairman Jerome Powell said earlier this year: “We (the US) don’t need to rush this project and we need to be first.” is not required to market”.
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Indeed, China has been working on a CBDC for more than nine years, while in the US, following a four-month public consultation by the Fed Reserve earlier this year, the White House has decided to set up a plan to ensure responsible development of the digital asset. Executive order issued. President Biden has said that his administration has placed the highest urgency on research and development efforts into potential design and development options for the digital dollar. The executive order mandates the Office of Science and Technology Policy, in consultation with other federal departments and agencies, to submit technical evaluations for a potential digital dollar, or CBDC. The National Science Foundation will lead an inter-agency effort to develop a national digital assets R&D agenda.
With the emergence of digital assets like crypto and stablecoins, all of this is geared towards addressing any potential threat to the global dominance of the US dollar. There are also other lofty objectives, such as using technology to “put them down, to advance democracy to lift the people up,” to quote President Biden.
For China, with its e-CNY or digital renminbi, the motivation or policy objective is probably different. For the Chinese central bank, the concern may be the dominance of two major players – Alipay and WePay – in the payment system and the need to counter it. There is a convergence between India and China in a growing number of customers with digital adoption, volume of online transactions and payments and India heading north. In this sense, successful digital adoption in India should pave the way for the launch of Digital Rupee.
But logically, many are bound to ask whether a CBDC or digital currency should be introduced in a country where there are multiple digital payment options available for small-ticket transactions too – UPI, NEFT, RTGS, IMPS, Digital Wallet and the like. One policy objective of CBDCs is financial inclusion, but this must first be addressed by governments by increasing income and improving financial literacy. If, as the RBI says, CBDCs are to be seen as a complementary alternative to other payment systems, the success of the digital rupee should be judged by the subsequent competition and improved efficiencies in the payment system. However, it is also important to differentiate between UPI which is just a payment platform and a CBDC which is backed by the sovereign.
The launch of a CBDC will not affect the balance sheet of the Indian central bank. To borrow from the US Fed chief the smell test can be on four counts – confidentiality, verification of identity, arbitration and widespread acceptance. Surely the RBI should do the same, apart from interoperability, cyber security, security and liquidity.
Where the digital rupee holds real promise from the Indian perspective, is in the area of cross-border transactions where costs are high and transaction times can be long. Negotiating with other central banks on this can be a real game changer.
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