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With a record surge in online payments since the outbreak of Covid-19, there is a need for the next level of innovation to expand the digital penetration in the country. Can digital currency be the answer for speeding that process up? Realising the need, the Reserve Bank of India is working on a phased implementation strategy for central bank digital currency, RBI deputy governor T Rabi Sankar said on Thursday.
A Central Bank Digital Currency (CBDC) is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.
With RBI eyeing ‘phased introduction’ of digital currency experts say CBDC can effectively be used for welfare schemes. “This is a significant step and the positive impact is that it will help showcase the true value of cryptocurrencies or Blockchain. Since the Central bank will be using a blockchain to create a form of currency that could be nominated as a cryptocurrency, it will be called a CDBC – Central Bank Digital Currency. Also, with CDBC in place, a separate blockchain like Ethereum will exist in the system, making counterfeiting difficult. Besides, CBDC can efficiently be used in case of welfare schemes among others that need to be administered directly into a person’s account,” said Gaurav Dahake, Founder & CEO, Bitbns.
A central bank’s digital currency will facilitate new aspects to work for the regulators, which were earlier hard to execute. “However, with a digital currency in place, there is still some ambiguity in terms of how it can be governed or controlled. In the case of digital currency in the wake of an episode such as demonetization, the government can take immediate action by reducing the money floating,” said Dahake.
How will it differ from existing cryptocurrencies, “Since central banks will operate digital currencies, the only valid difference here will be that they will be governed by central banks? In contrast, cryptocurrency or a blue public blockchain like Bitcoin and Ethereum are yet not governed by any regulatory body. Hence, one might not be able to access a central bank digital currency, whereas, in the case of Bitcoin, anyone can access it from anywhere across the globe,” said Dahake.
Pilot projects
While there is growing interest in CBDCs, a few countries have already started the pilot stage of launching their CBDCs. China has been working on the project since 2014. It is already testing the waters with the project being started in many cities including Shenzhen, Chengdu, and Suzhou. In China, distribution will be conducted through a two-tier system. That means their Central Bank will distribute the digital yuan to commercial banks. The commercial banks will then give digital yuan to the consumers in exchange for cash. But digital yuan is not a decentralised currency as it will be issued by the People’s Bank of China (PBOC).
“Although CBDCs are conceptually no different from banknotes, the introduction of CBDC would require an enabling legal framework since the current legal provisions are made keeping in mind currency in paper form,” Sankar said at a webinar organised by the Vidhi Centre for Legal Policy in New Delhi.
“CBDCs is likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation,” Sankar added.