India’s central bank hopes CBDC can combat crypto threat

In India, the central bank is pushing its digital central bank currency (CBDC) in the belief that it can counter perceived threats posed by cryptocurrencies to the country’s financial stability.

The Reserve Bank of India (RBI) outlined its intentions for its digital rupee – still in a research phase – in a concept note on Friday.

The memo extends the bank’s initial musings in February, when it flagged its intention to implement a CBDC sometime between 2022 and 2023.

Following the recommendations of an internal task force established by the bank in October 2020, the RBI now says it is exploring an account-based wholesale CBDC as well as a token-based retail CBDC via a “graded approach.”

Retail CBDCs refer to electronic forms of cash while wholesale CBDCs are used for interbank transfers between financial institutions.

Both wholesale and retail models are designed to improve efficiency and streamline settlement while reducing operating costs and promoting financial inclusion, RBI said.

The RBI outlined various phases before a final CBDC pilot: building a prototype, stress testing the project under both negative and positive use cases and finally evaluating the results.

The central bank added that CBDCs are sovereign currencies that give it greater control over its economic destiny as it seeks to counter the “rapid mushrooming of private currencies” that has challenged fundamental notions of money “as we know it.”

“In this context, it is the responsibility for [the] central bank to provide its citizens with a risk-free central bank digital money that will give users the same experience of trading currency in digital form without any of the risks associated with private cryptocurrencies,” RBI said in its note.

Private cryptocurrencies, in this case, are considered any digital currency that is not issued by the government. After a determination of the final results, India can move forward with implementation, the bank said without giving a final deadline.

India joins a long list of CBDC research projects worldwide

Given that other bank-issued digital currencies have been slow to take off, India’s lofty implementation plans could take years to see through to fruition, if at all.

China’s digital yuan, while still in its pilot phase, is the first of its kind to be tested and issued by a major economy. It has taken a lot of time to develop, stretching back as far as 2016 from when the country first announced its CBDC intentions.

In an effort to meet China’s growing ambitions, the US began exploring concepts for both retail and wholesale CBDCs from 2020 and in earnest through 2021 under Project Hamilton.

Data from the CBDC Tracker shows that most developed economies around the world have begun researching CBDC, with more than 120 projects listed. Of these, only two central banks – the Bahamas and Jamaica – have fully deployed CBDCs.

Six countries including Singapore, the Philippines, Denmark and Ecuador have canceled their efforts altogether, and only nine CBDCs are currently in the proof-of-concept stage.

There are seven active CBDC pilots around the world, including projects in Canada, Saudi Arabia and France.

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