The Reserve Bank of India has proposed a phased pilot of its version of a Central Bank Digital Currency, according to a paper released by the agency on Friday.
In what was published as a “concept note,” India’s central bank outlined its vision for a digital version of the rupee, referred to as the e-rupee. It also explained its rationale for implementing a CBDC (central bank digital currency) and how it would be tested in distinct phases.
Central banks across the globe are showing an increased interest in CBDCs as an alternative to paper money, in countries from Australia to the U.S.. The RBI paper cited China and 16 other countries that are currently piloting their own version of a CBDC as a reason for moving forward with one now.
“Currently, we are at the forefront of a watershed movement in the evolution of currency that will decisively change the very nature of money and its functions,” the paper states. “CBDCs are being seen as a promising invention and as the next step in the evolutionary progression of sovereign currency.”
The RBI plans on rolling out the e-rupee in limited pilot launches, with the intent of implementing it as an additional form of currency issued alongside paper money. The paper states the e-rupee will also serve as an alternative to cryptocurrencies.
The unfettered use of cryptocurrencies poses a risk to the financial and macroeconomic stability of India, the central bank said, which diminishes the government’s ability to determine and regulate monetary policy, furthering the need for a CBDC.
“CBDCs will provide the public with [the] benefits of virtual currencies while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies,” the RBI said.
The central bank is considering the release of two versions of a CBDC: one that would be used by people for making retail payments and another that would be used for the settlement of transfers between banks and wholesale transactions. Ultimately, a CBDC could make payments more efficient, robust, and trusted, according to the RBI.
While the RBI recognized it may be desirable for small transactions to be as anonymous as using cash, it said providing privacy would be a challenge.
“The potential for [an] anonymous digital currency to facilitate [a] shadow-economy and illegal transactions makes it highly unlikely that any CBDC would be designed to fully match the levels of anonymity and privacy currently available with physical cash,” the central bank wrote.
The Indian government first announced its plans to launch a CBDC in February, stating the technology would deliver a substantial boost to the country’s economy.
India is likely feeling the pressure of China’s CBDC rollout, which is steadily expanding, and has prompted debate among legislators in the U.S. about whether the supremacy of the dollar as the world’s reserve currency is at stake.
In June, Federal Reserve Chairman Jerome Powell said Congress will eventually receive guidance from the U.S. central bank on issuing a CBDC. The Fed has been looking into the prospect of a digital dollar since 2017.
“I think it’s something we really need to explore as a country,” he said. “It’s a very important potential financial innovation that will affect all Americans.”
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