The Reserve Bank of India (RBI) issued a concept note on Central Bank Digital Currency (CBDC).6 CBDC is a digital form of legal tender issued by a central bank. It will provide an additional option to the currently available forms of money.
Key features of CBDC are:
▪ Need for CBDC: According to RBI, there are several advantages to the issuance of CBDC. These include: (i) reduction in costs associated with physical cash management, (ii) providing the public with an alternative to private virtual currencies without associated risks, (iii) enhancing the resilience in payments and provision of core payment services outside the commercial banking system, (iv) boosting innovation in cross-border payments while making them instantaneous, and (v) supporting financial inclusion through transactions that are offline.
▪ Design: CBDC can be categorised into two groups: (i) general purpose or retail (CBDC-R) and (ii) wholesale (CBDC-W). CBDC-R can potentially be used by all private sector, nonfinancial consumers, and businesses. CBDC-W is designed for restricted access by financial institutions for improving the efficiency of interbank payments. RBI considers an indirect model for facilitating access to CBDC better suited for India’s needs. Under this model, persons would hold their CBDC in an account/wallet with a bank or service provider. The obligation to provide CBDC on demand would fall on the intermediary, with the central bank tracking the wholesale CBDC balances of the intermediaries.
▪ Technology platforms: Infrastructure for implementing CBDC could be based on a conventional centrally controlled database or a distributed ledger. In conventional databases, data is stored over multiple nodes which is controlled by a central entity. In distributed ledger systems, the database is jointly managed by multiple entities in a decentralised manner.
▪ Features: CBDC can be both interest and noninterest bearing instruments. RBI observed that since physical cash does not carry any interest it would be logical to offer non-interest bearing CBDCs.
RBI noted that reasonable anonymity for small value transactions, such as that associated with physical cash, may be a desirable option for CBDC-R. RBI will launch the first pilot of Digital Rupee for the wholesale segment with the participation of nine banks on November 1, 2022. 7 It will be used for secondary market transactions in government securities.
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