Overview of CBDC Development
The Reserve Bank of India (RBI) has released a 51-page note detailing the proposed features and rationale for its forthcoming central bank digital currency (CBDC). The document was published on Oct. 7, aiming to raise awareness of CBDCs and outline objectives, choices, and potential impacts of introducing a digital rupee in India.
Key Motivations for CBDC Issuance
The RBI emphasizes several motivations for implementing an Indian CBDC, including:
- Trust and safety
- Liquidity and settlement finality
- Integrity as a sovereign digital currency
One of the primary goals is to reduce operational costs associated with managing physical cash while improving financial inclusion and creating a resilient and efficient payment system. The RBI also intends to improve cross-border payments through features like offline functionality, beneficial in remote areas with unstable electricity supply.
Concerns Regarding Cryptocurrencies
Despite its advancements towards a CBDC, the RBI maintains a cautious stance towards public blockchains and cryptocurrencies, citing market volatility as a significant risk to Indian consumers. The central bank believes that these rising digital assets may undermine India’s financial stability and affect its monetary policy regulation capabilities.
Types of CBDC: Retail vs. Wholesale
The RBI’s note distinguishes between retail and wholesale CBDCs. Retail CBDC would be available to the public, while wholesale CBDC would have restricted access, primarily serving financial institutions. The RBI is contemplating the benefits of potentially introducing both forms into the marketplace.
Issuance and Management Models
The note discusses two issuance models: direct and indirect. A direct model would have the RBI managing the entire CBDC infrastructure, while an indirect model would employ intermediaries like banks and payment service providers. Additionally, a token-based model is preferred for retail use due to its resemblance to physical cash, while an account-based issuance model is seen for wholesale applications.
Infrastructure Considerations
The RBI outlines considerations for the infrastructure supporting the digital rupee, leaving open the option between centrally controlled databases and blockchain technology at this developmental stage. They state: “While crystallizing the design choices, technological considerations may be kept flexible to adapt to evolving needs.”
Implications for Privacy
In terms of privacy, the RBI acknowledges the anonymity that physical currency provides but asserts that digital transactions will create traceable trails. The central bank is evaluating the degree of anonymity necessary for small-value transactions, suggesting it may be a desirable feature in a retail CBDC.
Future of the Digital Rupee
The ongoing development of the digital rupee will likely include further stakeholder engagement and iterative designs. The RBI underlines the intention for the CBDC to complement existing forms of currency and provide enhanced digital payment options to users.
