RBI is all set to launch CBDC, to lower the country's cash dependency.

The Reserve Bank is working on lowering the country's dependence on cash by implementing CBDC (Central Bank Digital Currency). According to RBI's deputy governor Rabi Sankar, the CBDC will likely coexist with cash and other digital platforms for payments. The institution is currently focusing on formulating several inspections on the scope and legal framework of the proposed CBDC. Sankar emphasized the importance of discussing with stakeholders regarding the CBDC implementation.

The idea of CBDC is not a recent development. The credit of the CBDC origination goes to Nobel laureate James Tobin2, an American economist, who in the 1980s suggested that Federal Reserve Banks in the United States could make accessible to the public a widely attainable channel that has the benefits of deposits and safety of currency. It is in the last decade that the concept of digital currency has been widely discussed by central banks, economists & governments.

All other uses of paper in the financial system like bonds, securities, communications, correspondences, transactions, or messaging have now been replaced by digital and electronic versions. It is only the currency notes that are yet to be replaced. However, it has been observed that the use of physical cash in transactions is on a decline in recent years and this is further boosted by the ongoing Covid 19 pandemic.

Such developments have led many central banks and governments to step up towards implementing a digital version of fiat currency. Some of the central banks have already taken initiatives for pursuing specific policy objectives such as implementing negative interest rate monetary policy. The others are yet to provide the public with virtual currencies that carry the legitimate benefits of private virtual currencies while avoiding the damaging social and economic consequences of private currencies.

In terms of digital payments innovations, India is leading the world. Its payment systems are accessible 24*7 to both wholesale and retail customers. In fact, digital payments have grown at an outstanding CAGR of 55% (over the last five years). With such admirable progress of digitization, the RBI is now emphasizing the implementation of CBDC and inspection of various issues involving basic technology and issuance procedure.

Shankar said CBDCs are likely to be in the armaments of every central bank going forward, therefore placing this will require careful action and an innovative approach in the process of implementation. As said, every idea will have to wait for its time, perhaps the time for CBDCs is almost near, says Shankar.

According to Shankar, the bank has been surveying the advantages and disadvantages of introducing a CBDC for a while. After the survey, an evaluation will be made on the general purpose of CBDCs as part of the phased implementation. The CDBC also attempts to solve the volatility concerns regarding cryptocurrencies like Bitcoin. The bank believes that a CBDC lowers the risks as it is not subject to volatility.

Based on a 2021 survey made by the Bank for International Settlements it is being observed that 86% of central banks were actively researching the efficiencies of CBDCs, 60% were experimenting with the technology and 14% were using sample projects.

India now connects with other countries with a target of implementing CBDC. This comes after the European Central Bank stated that it would start a 24-month inspection phase on the development of a digital euro. If the phase is successful, the digital euro will be a reality by 2025.

Besides, China's central bank also indicated that its digital yuan trial had reached $5.3 billion in transaction value at the end of June. China heads the space and has already begun experimenting with digital currency in several cities while the U.S. Federal Reserve and Bank of England are looking into it for a future launch.

RBI has been actively operating on the idea of CBDC for years. Virtual currencies (VCs) like bitcoin have gained popularity in India in recent years and unofficial estimates suggest the country has around 15 million investors holding over ₹ 100 billion ($1.34 billion) in crypto assets.

The RBI has repeatedly expressed its concern over the spread and use of cryptocurrencies which it attempted to condemn in April 2018. It had to remove the prohibition in March 2020 when the country's top court said the move was unconstitutional.

With regards to the need for CBDCs, Shankar says "CBDCs are preferable and advantageous not just for the benefits they create in payments systems, but also might be necessary to safeguard the general public in an environment of volatile private VCs".

Sameer Narang, chief economist at Bank of Baroda said investors would still use private digital currencies, which is acknowledged in its value despite recent falls. He also added some users may want to utilize the private digital currencies as a store of value and not only for payments.