The Reserve Bank of India (“RBI”) has issued a booklet on Payment and Settlement Systems in India on January 25, 2021, for the decade of 2010 to 2020 (“Booklet”). The RBI acknowledges the factors which inhibit the digital push and systems to overcome such challenges. Among systems like self-regulatory organisations, offline payments, legal entity identifiers, geo-tagging, etc, the RBI has also discussed central bank digital currencies (“CBDC”) briefly. The RBI has defined the CBDC as a legal tender, which is denominated in a sovereign currency and a central bank liability appearing on its balance sheet which can be exchanged as par with the traditional deposits and cash.
The RBI has further recognised that private cryptocurrencies are gaining popularity in recent years and that Indian regulators have been skeptical of cryptocurrencies due to risks associated with the same. The RBI is only yet exploring the “need” for CBDC and how to operationalise it thereafter.
The RBI had previously in its article titled ‘Distributed Ledger Technology, Blockchain and Central Banks’ dated February 11, 2020, had discussed CBDC models of the People’s Bank of China (central bank of China) and Sveriges Riksbank (central bank of Sweden). The People’s Bank of China has developed its CBDC called the digital yuan which has been tested in specific areas, recently Shenzhen, and has plans to launch its beta version in 2021. China also has a draft law in place to regulate and legally validate its CBDC. The draft law places heavy fiscal penalties on the issuance of any illegal token to replace its CBDC. E-Krona issued by Riksbank in Sweden is being tested and the pilot is set to expire in February this year. The European Central Bank in October 2020 has also released a Eurosystem High-Level Task Force Report on Digital Euro highlighting the need for public consultation in creating a CBDC framework. Bahamas became the first country to launch its CBDC named ‘sand dollar’ in October last year. One sand dollar is equal to one Bahamian dollar.
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In our opinion, CBDC will play a crucial role in building a robust modern baking system. Holders of CBDC generally have a direct claim with the central bank (bypassing the commercial banks and financial institutions) similar to a coin and cash in hand. However, CBDCs are envisaged to co-exist and not replace traditional banking. Many countries have either initiated pilot projects or have been actively involved in research to understand the technology and prospective legislation, specifically after Facebook announced its plans to launch ‘Libra’. In our opinion, there is a need to actively study and allocate resources to develop CBDCs. India is a highly underbanked country and therefore CBDCs could help enhance financial inclusion as CBDCs do not necessarily require a bank account. Further, CBDCs will be specifically helpful in eliminating counterfeit currency circulation, which was earlier cited as one of the prominent reasons for demonetisation in 2016. We also recommend that an official committee be set up by the RBI to study its feasibility for the Indian economy. Many central banks have also partnered with private organisations to develop/ monitor their CBDCs. In case, the RBI perceives CBDCs positively, it could also invite private organisations to assist in developing or monitoring its CBDC. The recent World Economic Forum Digital Currency Governance Consortium Briefing Paper also highlights the potential strengthing of public-private partnership through the issuance of CBDC and make payments infrastructures more interoperable in nature. Given the vast amount of insight that central banks are likely to have over the financial data of CBDC users, and potentially users who interact with those users, a higher threshold for privacy regulation on CBDC is also required. Such a privacy system will have to be evaluated keeping anti-money laundering (“AML”) and know-your-customer standards in place. Given the current skepticism by the RBI on cryptocurrencies and AML standards, it will be interesting to analyse RBI’s approach towards maintaining financial data privacy for CBDC users.
Authored by Samaksh Khanna and Shivani Agarwal, Founders, BlockSuits.
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