Image source: Hindustan Times
The Reserve Bank of India recently announced plans to test e-rupees, a national cryptocurrency, with the support of the Central Bank of India.
A paper was released by the Reserve Bank of India, claiming they had developed a phased test of their version of the central bank’s digital currency.
The Central Bank of India has outlined its vision for the e-rupee, a digital version of the country’s official currency.
The proposal, or concept note, explains the rationale for launching a central bank digital currency, or CBDC.
The concept note also shed some light on how it would be tested throughout different stages.
Central banks around the world have shown growing interest in CBDC as it can serve as an alternative to physical cash.
The RBI cited China, which has been testing its own version of a CBDC alongside 16 other countries, as the driving force behind its decision to try 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.”
Co-existing with paper money
In limited trials, the RBI will introduce e-rupees.
They plan to make it another form of money while continuing to produce fiat money.
According to the document, electronic rupees will also be an alternative to cryptocurrencies.
However, the central bank said the unlimited use of cryptocurrency poses a risk to India’s financial and macroeconomic stability.
Widespread use will limit 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 of India will release two versions of the CBDC.
One of the CBDCs would be used for in-person payments, while the other would be used for processing bank wire transfers and bulk transactions.
According to the RBI, a CBDC could make payments more efficient, robust and reliable.
The RBI recognized that a CBDC would be desirable so that small transactions can be performed anonymously, such as with cash.
However, it also said that securing 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.”
Rollout and debates
The Indian government announced plans to launch a CBDC in February, saying the technology will help boost the country’s economy.
The country is likely feeling the pressure of China’s growing adoption of CBDCs.
Currently, the Chinese CBDC has sparked a debate among US lawmakers over the supremacy of the dollar as the world’s reserve currency.
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.”