The Reserve Bank of India (RBI) is to kick off central bank digital currency (CBDC) pilots ‘soon’, it has announced.
The central bank for the world’s second most populous country is to undertake ‘pilot launches for specific use cases’ of a digital rupee, a newly released 50-page paper reveals.
The RBI states that its ‘Concept Note on Central Bank Digital Currency (CBDC) for India’ aims to ‘create awareness about CBDCs in general and the planned features of the digital rupee, in particular’.
‘As the extent and scope of such pilot launches expand, RBI will continue to communicate about the specific features and benefits of a digital rupee, from time to time,’ according to the paper, which is compiled by the central bank’s fintech department.
The update follows the announcement of a timeline for a digital rupee’s launch by finance minister Nirmala Sitharaman in the Budget earlier this year. Sitharaman said on 1 February that the central bank would introduce the digital currency ‘starting 2022-2023’.
‘RBI has been exploring the pros and cons of introduction of CBDCs for some time and is currently engaged in working towards a phased implementation strategy, going step by step through various stages of pilots followed by the final launch, and simultaneously examining use cases for the issuance of its own CBDC, with minimal or no disruption to the financial system,’ the new RBI paper states. It describes the e-rupee as ‘substantially not different from banknotes… but being digital it is likely to be easier, faster and cheaper’.
The central bank set up an internal working group two years ago to carry out a study on a CBDC’s potential design and implementation architecture. Following the group’s recommendations, the RBI is exploring implementing an account-based CBDC for wholesale (interbank) purposes and a token-based CBDC for retail (general purpose) use.
This phase involves five steps, the paper states: building a prototype and specifying technical requirements to technology partners; tests in an ‘operationally controlled environment’ to examine functionality, including design, deployment plan and success criteria; performing ‘test cases with both positive and negative scenarios’ to examine durability (and documenting the results); evaluating test results and finalising prototype design; and conducting ‘large-scale pilots with a diverse and larger user base’.
Pilot participants must include users from different income and literary levels, regions, genders and age groups, the paper states, explaining that ‘this will help RBI understand the potential use of the CBDC in a diverse country like India’. The ‘results and learnings of the pilot need to be carefully evaluated and must be incorporated into the final design of the CBDC,’ it adds.
The central bank appears open-minded on the technology that would underpin the digital currency.
‘While crystallising the design choices in the initial stages, the technological considerations may be kept flexible and open-ended in order to incorporate the changing needs based on the evolution of the technological aspects of CBDCs,’ the paper states.
CBDC enthusiasm on the rise
Indian authorities were largely radiating a cautious attitude to issuing a CBDC as recently as last year. On 25 January 2021 the RBI said it was ‘exploring the possibility as to whether there is a need for a digital version of fiat [government-backed] currency and, in case there is, then how to operationalise it’ in a 142-page ‘Booklet on Payment Systems’ that allocated just two paragraphs to a potential CBDC.
But enthusiasm has grown significantly and relatively quickly. “Perhaps the time for CBDCs is nigh,” said one of the RBI’s deputy governors in July 2021. T Rabi Sankar said that “conducting pilots in wholesale and retail segments may be a possibility in near future”.
India’s biometric ID programme, Aadhaar, ‘should make the rollout of a CBDC considerably simpler compared to most countries that lack a centralised identity system’, blockchain news outlet Ledger Insights has pointed out. But launching a CBDC in India would also be multiple challenges, including reaching remote populations that lack reliable internet access and mobile-phone coverage.
*** National Payments Corporation of India (NCPI), the non-profit umbrella initiative of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA), is running a ‘NPCI Blockchain Hackathon’, open to ‘working professionals’ worldwide. Registrations close on 19 October.
‘India to launch digital rupee by early 2023’ – our news story (8 February 2022) on finance minister Nirmala Sitharaman announcing plans for the issuance of a digital rupee during her presentation of the 2022-2023 Budget
‘CBDC pilots in India possible in “near future”’ – our news story (9 August 2021) on RBI deputy governor T Rabi Sankar saying that ‘perhaps the time for CBDCs is nigh’
‘“Sceptical” India investigates central bank digital currency’ – our news story (1 February 2021) on the RBI researching how an Indian CBDC could work