The Reserve Bank of India (RBI) has recently released a Concept Note on Central Bank Digital Currency (CBDC) (CN) outlining the principles it will adopt when developing an ecosystem for India’s first CBDC or e-rupee. Two standout principles are that the e-rupee will be as close to cash as possible and that the launch of the e-rupee will cause minimum disruption to the banking and financial markets.
The RBI has been extremely wary of private cryptocurrencies but has consistently maintained that it is in favour of and is working towards the launch of a CBDC. A CBDC is not a substitute for private cryptocurrencies. The two operate in completely different spaces: a CBDC has sovereign backing and is a digital form of legal tender; the best-known private cryptocurrencies are not linked to any specific asset or commodity, operate on a decentralised blockchain and may have multiple use cases. The CN sets out key design choices for the launch of the e-rupee.
The RBI indicates that the e-rupee will be available for retail (CBDC-R) and wholesale (CBDC-W) use. The CBDC-R will be available to individual users for everyday payments. CBDC-W can be used by banks for interbank settlements. Many central banks have limited CBDCs to wholesale only, given that a retail launch requires greater planning and infrastructure. The RBI confirms that, as with physical currency, it will be the issuing agency for the e-rupee, but banks and other intermediaries will be authorised to manage the operation, account keeping and verification of transactions. This is a practical approach, given that as a central bank, the RBI does not have the resources to manage the operational aspects of a CBDC such as KYC checks, wallet opening, and transaction verification.
Central banks across the world struggle with the question of CBDC anonymity. A key characteristic of cash is its anonymity, with no record or trail of payer and beneficiary. If a CBDC is to replace cash, it must also operate on the basis of anonymity. However, complete anonymity does not allow regulators to address concerns about anti-money laundering and counter-terrorist financing (AML and CTF). The RBI says it will adopt a middle path for the e-rupee. Small value retail transactions may be anonymous, but larger transactions will require identity checks and appropriate AML and CFT safeguards.
A key question for any CBDC framework is whether it is interest-bearing. Payment of interest will encourage consumers to use, but will have serious implications for the banking system. If a CBDC competes with bank deposits, there may be movement of money out of the banking system, impacting the availability and cost of credit. The RBI has said, given its stated objective of the e-rupee causing minimum disruption, the e-rupee will be non-interest bearing and will operate more like cash than deposits. Banks are likely to approve this design choice.
An important question concerns the real utility of a CBDC. This is more relevant for a country like India, which has already seen tremendous innovation in digital payments. The United Payments Interface (UPI) architecture has revolutionised digital payments and is today recognised as a global leader. The RBI has indicated that the e-rupee will likely be interoperable with the UPI, able to integrate with the existing digital payments ecosystem seamlessly.
A CBDC, however, offers benefits and a utility that differ from digital payment transactions. These include lower settlement costs and lower settlement risks with the movement away from cash and the elimination of the costs of printing, management and transport of paper money. CBDCs can revolutionise cross-border trade by enabling cheaper and faster payments and transfers across borders. This requires integration with CBDC systems across multiple jurisdictions and will likely be a phase two initiative. A CBDC also creates platforms that can support the next generation of innovation in financial products, such as using private blockchains to issue securities.
Before the e-rupee is rolled out, there must be more discussion among stakeholders, detailed framework design choices made and planning of infrastructure. Details of roles and responsibilities of intermediaries are needed. The CN is a good first step towards creating a CBDC ecosystem, but more work lies ahead.
Shilpa Mankar Ahluwalia, Partner & Head of Fintech, Shardul Amarchand Mangaldas & Co.
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