Explained: India inches closer to launching a digital currency; 5 key points

RBI Governor Shaktikanta Das.

RBI Governor Shaktikanta Das.

In an interview with CNBC TV18 on February 24, the Reserve Bank of India (RBI) Governor Shaktikanta Das said the RBI is working on procedural issues to launch its digital currency in the country soon, though a date has not been finalised yet. “While we cannot guess the date of its launch, it is receiving our full attention,” he said.

When did the RBI speak of a digital currency last time?

On January 25, the RBI said it was examining if there was a need to introduce central bank digital currency (CBDC) in the country and, if yes, how to operationalise it. The RBI’s statement came against the backdrop of private digital currencies, virtual currencies, and cryptocurrencies gaining popularity in recent years. In India, the regulators and governments have been sceptical about these currencies and are apprehensive about the associated risks.

“Nevertheless, the RBI is exploring the possibility as to whether there is a need for a digital version of fiat currency and in case there is, then how to operationalise it,” the RBI said, releasing a booklet of payment systems in India.

What is CBDC?

CBDC is a legal tender and a central bank liability in digital form denominated in a sovereign currency and appearing on the central bank’s balance sheet. It is in the form of electronic currency which can be converted or exchanged at par with similarly denominated cash and traditional central bank deposits.

“Innovations are changing the payments space rapidly. This has made central banks around the world to examine whether they could leverage on technology and issue fiat money in digital form,” the RBI said.

How old is the concept?

The concept of CBDC has been around for a while. This has been experimented on a pilot basis in some countries. For example, Turkey had said it would pilot digital currencies in 2021.

In India too, there have been discussions around the subject.

In February 2020 RBI bulletin, the central bank, citing a survey of central banks conducted by the Bank for International Settlements, had said some 80 percent of the 66 responding central banks have started projects to explore the use of CBDC in some form.

“These central banks are contemplating and studying the potential benefits and implications of CBDC in the economy. We discuss below the efforts being made in central banks of China and Sweden in this regard,” the RBI Bulletin had said then.

The fact that the RBI is now evaluating the possibility of issuing its own cryptocurrency shows the importance of this sector in the future of currency regulations.

What is the RBI’s stance on cryptocurrencies?

While the RBI is open to the idea of a CBDC, it isn’t comfortable with a cryptocurrency market in India. The RBI has said it is concerned that cryptocurrencies will impact financial stability in the economy, ahead of the government’s plans to introduce a law to ban private cryptocurrencies such as bitcoin.

The RBI has conveyed these “major concerns” to the government, Governor Shaktikanta Das said in an interview with CNBC TV-18 on February 24. The views of the monetary authority, which has been fundamentally opposed to cryptocurrencies, are significant as the government is also preparing to draft laws to ban this form of assets and instead create a framework for an official digital currency to be issued by the central bank.

The RBI Governor has been against private cryptocurrencies, reiterating that the sovereign can be the only issuer of currency in the country. In December 2019, Das had said it was too early to talk about a central bank-issued digital currency due to technological handicaps, but the RBI was looking into this idea.

What is the Government stance?

As mentioned above, besides the RBI, even the central government has been sceptical of privately issued cryptocurrencies. In fact, there is a bill lying with Parliament requesting for a complete ban on privately held digital currencies. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is expected to be tabled in Parliament when the Budget session resumes on March 8.