October 11, 2022
The Reserve Bank of India (RBI) released a concept note on the Central Bank Digital Currency (CBDC) for India on Friday.
RBI defines CBDC as legal tender issued by a central bank in digital form. It is similar to sovereign paper money but takes a different form, exchangeable at par with existing currency and must be accepted as means of payment, legal tender and a safe store of value. CBDCs would appear as a liability on a central bank’s balance sheet.
The Bank for International Settlements has defined the “fundamental principles” and “essential characteristics” of a CBDC, to guide exploration and support public policy objectives, consistent with the needs of the existing mandate of central banks.
The CBDC is an extension of today’s state-of-the-art payment systems that are affordable, accessible, convenient, efficient, safe, secure, and available 24x7x365 days a year. This was supported by the creation of robust 24-hour electronic payment systems, such as Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT), which facilitated real-time fund transfers. or almost real. In addition, the launch of Immediate Payment Service (IMPS) and Unified Payment Interface (UPI) for instant payment settlement, introduction of mobile payment systems such as Bharat Bill Payment System (BBPS ) and the National Electronic Toll Collection (NETC) to facilitate electronic toll payments were the defining moments that transformed the country’s payments ecosystem and attracted international recognition, the concept note states.
The convenience of these payment systems ensured rapid acceptance as they offered consumers an alternative to using cash and paper to make payments. Facilitating non-banking FinTech companies into the payment ecosystem as issuers of PPIs, Bharat Bill Payment Operating Units (BBPOUs) and third-party application providers in the UPI platform has driven the adoption of digital payments in the country. The Reserve Bank has always acted as a catalyst in achieving its public policy objective of developing and promoting a safe, secure, robust, efficient and interoperable payment system.
Moreover, with the advent of advanced technologies, digitization of currency is the next big step in monetary history.
RBI has been exploring the pros and cons of introducing CBDCs for some time and is currently working on a phased implementation strategy, step-by-step through various stages of pilot projects followed by final launch and simultaneously reviewing the use case for broadcast. of its own CBDC (Digital Rupee (eRupee)), with little or no disruption to the financial system.
- The CBDC, being a sovereign currency, has unique advantages of central bank currency, viz. confidence, security, liquidity, finality and integrity of settlement;
- This would help to reduce the operational costs of physical cash management, foster financial inclusion, bring resilience, efficiency and innovation to the payment system, increase the efficiency of the settlement system and drive innovation in the area of cross-border payments;
- The CBDC would facilitate the public uses that any private virtual currency can provide, without the associated risks;
- Using offline functionality in the CBDC would also be beneficial in remote locations and provide uptime and resiliency benefits when power or mobile network is unavailable.
Private virtual currencies are in substantial contradiction to the historical concept of money. They are not commodities or commodity receivables because they have no intrinsic value. The rapid proliferation of private cryptocurrencies in recent years has attempted to challenge the fundamental notion of money as we know it. Claiming the benefits of decentralization, cryptocurrencies are being hailed as an innovation that would usher in decentralized finance and disrupt the traditional financial system. However, the inherent design of cryptocurrencies is more designed to circumvent the established and regulated intermediation and control arrangements that play a crucial role in ensuring the integrity and stability of the monetary and financial ecosystem.
In addition, a wider proliferation of cryptocurrencies could reduce the potential of monetary authorities to determine and regulate monetary policy and the country’s monetary system, which could pose a serious challenge to the stability of the country’s financial system. In this context, it is the responsibility of the central bank to provide its citizens with a risk-free central bank digital currency that will provide users with the same currency trading experience in digital form, without any of the risk associated with private cryptocurrencies. .
CBDCs will provide the public with the benefits of virtual currencies while ensuring consumer protection by avoiding the harmful social and economic consequences of private virtual currencies.
The purpose of publishing this concept note is to raise awareness of CBDCs in general and the planned features of Digital Rupee (eRupee), in particular, the statement adds.