Central Bank of India praises CBDC’s potential to transform payment systems

What’s new? On his last day as Governor of the Reserve Bank of India (RBI), Shaktikanta Das shared his vision for transforming the country’s economy with the digital rupee. During his farewell speech on December 10, he spoke about his six-year efforts to leverage new technologies, including the establishment of the RBI Innovation Hub in Bangalore and a regulatory sandbox for fintech companies.

Recording of the speech

What else is known? Talking about India’s progress in developing a national cryptocurrency, Das said that many central banks around the world are stuck in initial discussions and experiments, whereas RBI has pioneered in this area by launching its own pilot project.

The digital rupee is the national cryptocurrency or Central Bank Digital Currency (CBDC). It, like other CBDCs, is issued by the central bank and is the third form of fiat currency along with cash and non-cash money.

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Back in July 2021, the RBI announced that it was preparing for a phased rollout of the digital rupee across the country. As per the plan, the asset would be used alongside cash and other forms of digital payments.

At that time, the bank was looking into various aspects of digital currency, including its security, impact on the financial sector as well as monetary policy and currency in circulation. Das emphasized that he was treating the asset with extreme caution because it was a completely new product for RBI.

In March 2022, India’s Finance Minister Nirmala Sitharaman said that CBDC will help in the development of the country’s digital economy and also create a more efficient and cheaper currency management system. She later added that the digital asset will facilitate mass payments between countries, large transactions between institutions, and between central banks themselves.

With a delay of nearly a year from the original timeline, testing of the digital rupee for retail and wholesale payments began in late 2022.

Retail CBDC is used by individuals to settle payments with businesses, stores, or among themselves, while wholesale CBDC is used by financial institutions to settle transactions in financial markets.

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As part of the retail pilot in New Delhi, Bhubaneswar, Mumbai, and Bangalore, post RBI’s launch, the digital rupee was distributed through intermediary banks including IDFC First Bank, State Bank of India, Yes Bank, and ICICI Bank. These banks launched wallets to manage the asset. The project involves both P2P transactions and QR codes to make payments at retail outlets.

Despite progress in creating a national digital currency, India’s Central Bank and Finance Ministry have consistently opposed the integration of cryptocurrencies into the financial system. Notably, India has been ranked number one for two consecutive years (2023-2024) for cryptocurrency adoption by blockchain analytics firm Chainalysis.

In a new speech, Shaktikanta Das expressed confidence that the digital rupee will transform the country’s economy and domestic and cross-border payment systems: “As I see it, CBDC has a huge potential in the coming years, in the future. In fact, it is the future of currency.”

While Das had earlier advised against moving to widespread adoption of the asset without understanding the potential impact of the technology on users and monetary policy, he noted that this data can be gathered from users through pilot projects and adoption can be done gradually.