Need to adopt basic CBDC models initially for minimum impact on monetary policy: RBI

The Reserve Bank of India (RBI) has said that it is necessary to adopt basic models initially for the Central Bank Digital Currency (CBDC), and test comprehensively so that it has minimal impact on monetary policy and the banking system. 

"This is necessary because of the CBDC's dynamic impact on macroeconomic policymaking," says RBI's report on 'Trend and Progress of Banking in India 2020-21', released today.

"India’s progress in payment systems will provide a useful backbone to make a state-of-the-art CBDC available to its citizens and financial institutions," said RBI in its report. 

The RBI Governor Shaktikanta Das had recently also highlighted cyber security and digital frauds as two major areas of concern in a CBDC universe.

The central bankers across the globe are now deliberating on how to implement CBDCs, moving ahead from their initial exploratory forays.

"The main concern comes from the angle of cyber security and the possibility of digital frauds. So, we have to be very careful about that just as a few years ago we had a major concern was on fake Indian currency notes. Similar things can also happen when you are launching CBDC," Governor Das had pointed out in the last monetary policy briefing.

"In a CBDC universe, we have to be that much more careful with regard to ensuring cyber security and taking preventive steps to prevent any kinds of frauds because there will be attempts. We have to have robust systems and firewalls," he had added.

The RBI has already sent a proposal to the government for amending the RBI Act, 1934,  to enhance the scope of the definition of a ‘bank note’ and include currency in digital form. The new regulatory framework for digital currency would be part of the Cryptocurrency and Official Digital Currency Bill, 2021.

In fact, the RBI has already made progress in launching the new digital currency.

"Certain crucial questions about design elements of CBDC need to be navigated before its introduction, e.g., whether the digital currency would be general-purpose and available for retail use , or would it be for wholesale use," said the RBI in its report.  

"A lot of work has been done on the wholesale side. Some more work is be required on the retail front. Whichever gets readied first, we will release it for pilots," RBI's Deputy Governor T. Rabi Sankar had also argued recently.

The RBI has listed out benefits of CBDC such as lesser dependency on cash, much higher seigniorage ( no printing of notes required ) due to lower transaction costs, and reduced settlement risk for banks.

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