Image source: Hindustan Times
The Reserve Bank of India recently announced their intention to test e-rupees, a national cryptocurrency, with the support of the Central Bank of India.
A paper released by the Reserve Bank of India states that they have developed a phased test of their version of a central bank digital currency.
The Central Bank of India has outlined its vision for the e-rupee, a digital version of the rupee, the country’s official currency.
The proposal, or concept note, explains the rationale for launching a central bank digital currency (CBDC).
It also shed light on how it would be tested at various stages.
Central banks around the world have shown increased interest in CBDC as an alternative to physical cash.
The RBI alluded to China, which is testing its own version of a CBDC alongside 16 other countries, as the driver behind its decision to switch to digital currencies.
The paper reads:
“Currently, we are at the forefront of a watershed movement in the evolution of currency that will decisively change the very nature of money and its functions.”
“CBDCs are being seen as a promising invention and as the next step in the evolutionary progression of sovereign currency.”
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Co-existing with paper money
The RBI will introduce the e-rupee in limited trials.
They plan to implement it as another form of issued currency while continuing to produce paper money.
According to the document, electronic rupees will also be an alternative to cryptocurrencies.
However, the central bank said the widespread use of cryptocurrency poses a risk to India’s financial and macroeconomic stability.
This reduces the government’s ability to set and regulate monetary policy, making the CBDC a necessity.
“CBDCs will provide the public with [the] benefits of virtual currencies while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies,” said the RBI.
The central bank also plans to release two versions of the CBDC.
One of the CBDCs would be used for personal payments, while the other would be used to process bank transfers and wholesale transactions.
According to the RBI, a CBDC could make payments more efficient, robust, and reliable.
The RBI has recognized that a CBDC would be desirable so that small transactions could be as anonymous as cash.
However, he also said ensuring confidentiality is a challenge.
The central bank wrote:
“The potential for [an] anonymous digital currency to facilitate [a] shadow-economy and illegal transactions makes it highly unlikely that any CBDC would be designed to fully match the levels of anonymity and privacy currently available with physical cash.”
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Rollout and debates
In February, the Indian government announced plans to launch a CBDC, saying the technology will help boost the country’s economy significantly.
The country is likely feeling pressure from China’s growing adoption of CBDCs.
Currently, China’s CBDC has sparked a debate among US lawmakers regarding the supremacy of the dollar as the world’s reserve currency is at stake.
In June, Federal Reserve Chairman Jerome Powell said Congress would eventually receive guidance from the Federal Reserve on issuing a CBDC.
The Fed struggled with the prospect of a digital dollar in 2017.
“I think it’s something we really need to explore as a country,” said Powell.
“It’s a very important potential financial innovation that will affect all Americans.”