SETTING THE STAGE FOR A DIGITAL RUPEE FOR INDIA
Recommending and designing the legal and policy framework for a Central Bank digital currency to reinforce India's leadership in digital payments
Context
In the recent budget announcement, the Finance Minister announced that India will soon issue its central bank digital currency ('CBDC') or a digital rupee. With this announcement, India joins several advanced and emerging economies that are exploring their own CBDC. For instance, in January 2021, according to a report by the Bank for International Settlements (BIS), 86% of the 67 central banks surveyed were actively researching CBDCs, and by mid- 2021, the Bahamas had launched its CBDC while China had piloted its CBDC in major cities.
As economies across the world continue to foster digital payments, it is important to ensure that retail users have access to central bank money. The conversation on CBDCs has also emerged as a response to the growth of various private digital currencies, such as cryptocurrencies and stablecoins, which can have significant impact on investor interests and financial systems.
India, however, has been missing from this conversation, with a complete absence of serious policy research in this area. Vidhi has filled this gap with research on a framework for issuing a digital rupee in India. Even as a CBDC is expected to promote the utility and value of central bank money in a digital economy, its issuance requires a thorough examination of risk factors, as well as financial and legal considerations.
Vidhi's working paper, 'A Central Bank Digital Currency for India | Proceeding with Cautious Optimism', through in-depth research, including tracking CBDC developments in 43 countries, and extensive consultations with stakeholders in the ecosystem, makes necessary recommendations on these fronts. We have every reason to believe that these are currently being acted upon as India rolls out the digital rupee.
Examining the issuance of a
digital rupee for india
A digital rupee for India presents both opportunities and challenges. It can complement efforts to promote efficiency in digital payments, reduce settlement risks, and provide continued access to central bank money in a digital world. At the same time, its impact on the potential disintermediation of the banking sector, credit provision, and possible privacy and security risks has to be carefully considered.
In this context, Vidhi's working paper tracks CBDC developments globally to examine common policy motivations that can inform CBDC issuance in India. While CBDCs can be issued for retail purposes as well as for wholesale transactions (intended for inter-bank payments), Vidhi's paper finds that the transformative nature of recent CBDC initiatives focuses on retail transactions.
Informing the design of a digital rupee – To ensure the effective use of a digital rupee for retail purposes, Vidhi identifies necessary functional features to inform its design. For instance, it must be:
- Resilient to operational disruptions, with possibility for offline features.
- Must be available on a 24X7 basis and offer real time settlement of payments.
- Minimise barriers to use and avoid excluding certain segments of the population or devices.
- Must be scalable to respond to changes in volume and value of transactions.
- Should allow interoperability among different types of users as far as possible.
Introducing a two-tiered model for the RBI – The introduction of a digital rupee in India may lead to the RBI introducing services for the general public. This marks a departure from its existing operations, in which the RBI has no direct relationship with the end consumers. Based on an analysis of global best practices, Vidhi's working paper suggests a two-tiered model for India, where the RBI can assume a less operative role, with most consumer-facing services being outsourced to intermediaries. However, even under this model, the RBI will still need to develop monitoring, oversight and risk management functions, and establish systems to respond to potential disruptions.
Legal considerations for issuing a digital rupee – The introduction of a digital rupee also raises important legal issues. While its final design will determine the legislative interventions required, Vidhi's working paper highlights preliminary legislative issues, including:
- First, any CBDC issuance by the RBI must be backed by law. Hence, for a retail token-based digital rupee, the Reserve Bank of India Act, 1934 ('RBI Act') must be amended to expressly enable RBI to issue currency in digital form.
- Second, the introduction of a two-tiered model will involve participation of actors from the private sector. This calls for designing a separate regulatory framework for supervision and regulation of such actors.
- Third, depending on the design of the digital rupee, other laws that may have to be reviewed to facilitate its issuance, including data protection laws (in case personal information is stored), prevention of money laundering law and its applicability to the RBI, and criminal laws which deal with counterfeiting of currencies.
Impact
To initiate a conversation and set the public agenda for the issuance of a digital rupee in India, Vidhi invited T Rabi Sankar, Deputy Governor of the Reserve Bank of India ('RBI/Bank') at a discussion on the recommendations of its working paper. It was here that the Deputy Governor announced for the first time that the RBI was working towards a 'phased implementation strategy' for issuing a digital rupee in India, outlining the Bank's stance and work on it so far.
Being among the first research organisations to initiate a conversation on CBDC issuance in India combined with the announcement by the RBI, Vidhi's work was covered in over 100 media articles, thus establishing its primacy in setting the stage for a public discourse on this subject.
To initiate a conversation and set the public agenda for the issuance of a digital rupee in India, Vidhi invited T Rabi Sankar, Deputy Governor of the Reserve Bank of India ('RBI/Bank') at a discussion on the recommendations of its working paper. It was here that the Deputy Governor announced for the first time that the RBI was working towards a 'phased implementation strategy' for issuing a digital rupee in India, outlining the Bank's stance and work on it so far.
Being among the first research organisations to initiate a conversation on CBDC issuance in India combined with the announcement by the RBI, Vidhi's work was covered in over 100 media articles, thus establishing its primacy in setting the stage for a public discourse on this subject.
Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk. Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits.
— T Rabi Sankar
DEPUTY GOVERNOR, RBI, SPEAKING AT VIDHI'S DISCUSSION ON CBDC