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Working on phased introduction of own digital currency, says RBI deputy governor


NEW DELHI: The Reserve Bank of India (RBI) is working on the gradual introduction of such coins, its RBI Deputy Governor T Rabi Sankar said on Thursday.
Delivering a speech in an online discussion, Sankar said that the central bank digital currency (CBDC) idea is mature and that many central banks around the world are working towards it.
The RBI is considering certain pilot programs for the proposed CBDC and is in the process of launching it in the wholesale and retail segments in the near future, he added.
The central bank has been exploring the pros and cons of introducing CBDC for quite some time.
Sankar said the RBI is examining cases that could be implemented with little or no disruption to the banking system and monetary policy.
What is CBDC
According to RBI, CBDC is a legal tender issued by a central banking digital form. It is the same as fiat currency and is one-to-one interchangeable with fiat currency, only its shape is different.
However, it is not comparable to a private virtual currency that is substantially opposed to the historical concept of money.
In his speech, Sankar pointed out that CBDC is the same as currency issued by a central bank, but takes a different form than paper (or polymer).
“It is sovereign currency in electronic form and would appear as a liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, shape and use of a CBDC can be shaped to specific requirements. CBDCs must be exchangeable at the same time. pair with cash, “he noted.
Why is CBDC needed
Sankar said that developing a national CBDC could provide the public with the uses offered by any private virtual currency and, to that extent, could maintain the public’s preference for the rupee.
“It could also protect the public from the abnormal level of volatility some of these virtual currencies experience,” he added.
The introduction of CBDC, he said, has the potential to provide significant benefits, such as less dependence on cash, increased seigniorage due to lower transaction costs and lower settlement risk.
In addition, the payments using these currencies are final and, therefore, reduce the risk of settlement in the financial system. It will also potentially enable a more profitable and real-time globalization of payment systems, the lieutenant governor noted.
CBDC in India
The Ministry of Finance, in 2017, had established a high-level inter-ministerial committee to examine the policy and legal framework for the regulation of virtual / crypto currencies. He had recommended the introduction of CBDC as a digital form of fiat money in India.
The introduction of CBDC, he said, has the potential to provide significant benefits, such as less dependence on cash, increased seigniorage due to lower transaction costs and lower settlement risk.
“The introduction of CBDC would possibly lead to a more robust, efficient, reliable, regulated and currency-based payment option. There are associated risks, to be sure, but they must be carefully weighed against the potential benefits,” he said.
The lieutenant governor said it would be an effort by the RBI, “as we move in the direction of the Indian CBDC,” to take the necessary steps that would reiterate the country’s leadership position in payment systems.
Challenges in introducing CBDC in India
The RBI Lieutenant Governor noted that the introduction of CBDC would require an enabling legal framework, as current legal provisions are established with paper currency in mind.
Sankar emphasized that drawing board considerations and stakeholder deliberations are important, while technological challenges must also be considered.
Some key issues under RBI scrutiny include the scope of CBDCs, the underlying technology, the validation mechanism, and the distribution architecture.
He further said that legal changes would be necessary since the current provisions have been made taking into account the currency in physical form under the Reserve Bank of India Act.
He also noted that consequential amendments would be required to the Coinage Act, the Foreign Exchange Administration Act (FEMA), and the Information Technology Act.
“As has been said, any idea will have to wait for its moment. Perhaps the CBDC moment is near,” he remarked.
Additionally, Sankar highlighted some of the risks associated with digital currencies, such as the sudden flight of money from a bank under stress.
“There are associated risks … but they must be carefully weighed against the possible benefits,” he added.
(With inputs from agencies)

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