The country of India recently revealed plans of testing a national cryptocurrency with the backing of India’s central bank.
According to a paper released by the Reserve Bank of India, they have proposed a phased pilot of its version of a Central Bank Digital Currency.
India’s central bank outlined its vision for the e-rupee, a digital version of the rupee.
The proposal, or concept note, explained its rationale for implementing a central bank digital currency or CBDC and how it would be tested in distinct phases.
Across the globe, central banks have shown an increased interest in CBDC as an alternative to physical cash.
The RBI cited China, among 16 other countries, piloting their own version of a CBDC as a driving force behind their progress.
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
The RBI is tipped to roll out the e-rupee in limited pilot launches.
They intend to implement it as another form of currency issued alongside paper money.
According to the paper, e-rupees will also be an alternative to cryptocurrencies.
However, the central bank said the unrestrained use of cryptocurrency poses a risk to the financial and macroeconomic stability of India.
It diminishes the government’s ability to ascertain and regulate monetary policy, making 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 is also considering releasing two versions of a CBDC.
One would be used by people for retail payments while the other would be used for the settlement of transfers between banks and wholesale transactions.
According to the RBI, a CBDC could make payments more efficient, robust, and trusted.
The RBI acknowledged that a CBDC would be desirable for small transactions to be as anonymous as with cash.
However, it also said providing privacy presents 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 of launching a CBDC earlier in February, saying the technology would be a significant boost to the country’s economy.
India likely feels pressured from China’s CBDC rollout, which is steadily expanding.
China’s CBDC has also sparked debates among legislators in the United States about whether the supremacy of the dollar as the world’s reserve currency is at stake.
In June, Jerome Powell, the Chairman of the Federal Reserve, said Congress will eventually receive guidance from the US central bank on the issuance of a CBDC.
The Fed has looked into the prospect of a digital dollar as far back as 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.”