References to concept of Central Bank Digital Currency (CBDC) can be traced back to the 1980s. In the past decade this term has started gaining traction as nearly 100 countries have decided to look at it seriously and are at different stages of development. In India, the Reserve Bank of India (RBI) started progressing towards launch of CBDC with the assistance of participants ranging from Mr. Amitabh Bachchan through his famous show Kaun Banega Crorepati to a migrant fruit seller stationed outside RBI headquarters in Mumbai.
Stimulus For Recasting of Currency
Introduction of cryptocurrencies posed a threat to stability of financial markets across borders. Additionally, with mobilization of the mass campaign – ‘Digital India’, Indian citizens started moving away from cash-based transactions to digital form of transactions such as UPI. To cater to the needs and demands of the Indian financial market and for providing a sovereign alternative to third party cryptocurrencies, RBI started working towards introducing CBDC in India further expanding the digital ecosystem of the country. Successful implementation of CBDC by RBI will potentially place India at the forefront in innovation surrounding crypto assets and blockchain technology.
Various economies of the world such as the Bahamas, Nigeria and Jamaica, have introduced CBDC to achieve specific favorable outcomes relevant to their financial system. India also faces multifaceted challenges which are unique to the financial system of the country. Introduction of CBDCs will help RBI escalate the multidimensionality of Indian economy. Shockingly, as per the available data, RBI spent approximately INR 5,000 Crores for printing and distribution of currency notes in 2021-22. This is a huge cost for a developing economy like India. CBDC will support RBI in improving economics of currency distribution and management and avoid issues like counterfeiting, further, it will also enable users to access and hold the Indian rupee in a digital format, without the hassle of locating and visiting a working ATM or a bank to withdraw cash.
Legal Considerations and Implications
With the amendments introduced in the Reserve Bank of India Act, 1934, by way of the Finance Act, 2022, India took its first step to lawfully enable RBI to issue bank notes in a digital form. In the Concept Note on CBDC issued by RBI in October 2022, it recognised that most of the relevant existing legal framework will require necessary amendments or promulgation of specific regulations. A few critical points of consideration (other than the basics involving money laundering, bribery, tax evasions, etc.) for introduction of amendments / regulations are:
- Digital Ecosystem: Issuance and exchange of CBDCs requires a complex ecosystem to be developed and maintained by intermediaries. Thus, relevant regulations addressing governance of intermediaries, minimum technological requirements, reporting requirements, etc. will have to be framed.
- Protection from counterfeit and cyber-attacks: Digital platforms in India are a relatively new concept. Thus, risks associated with them pose a higher threat to vulnerable Indian population. Therefore, it will have to be ensured that robust technological safeguards and fallback mechanisms are put in place to block any attacks on financial system of the country.
- Grievance Redressal and Backend Support: Acceptance of CBDC by the masses necessitates building an unwavering trust in technology and assistance available in case of mishaps. This necessitates building a resilient backend system to address any query in a time bound manner. Regulations may also provide for compensation to users in case of losses incurred due to a delay in redressal or deficiency in technology.
- Tracking of Payments: Given that CBDC is based on distributed ledger (blockchain) technology, a framework will be required which enables RBI to track transfers of CBDC from one bearer to another. This will be helpful in tracking any payments linked with activities involving bribery, corruption, money laundering and terrorism.
- Privacy and Data Protection: In contrast to the above, one of the most critical features of paper currency is anonymity of transactions. Since the same might not be practically possible in digital sphere, relevant regulations will be required to address this for limiting access and usage of information. Heavy penalties and criminal prosecution may also be provided for cases of breach of personal data or leaks.
Way Forward
RBI has adopted a graded approach to introduce CBDC in India. This approach involves going through stages of proof of concept, pilots and finally launching the product. RBI aims to conclude these steps within a timeline of one year. On November 1, 2022, RBI already launched first pilot in relation to wholesale segment of CBDC focusing on ‘settlement of secondary market transactions in government securities’. Furthermore, RBI on December 1, 2022, has also launched a pilot program in relation to retail segment of CBDC which focusses on testing robustness of entire process of CBDC creation, distribution and retail usage in real time. Since there are not many precedents available regarding CBDCs, RBI is taking utmost precaution to produce a safe and robust model from learnings of pilot programs. Gradually, these pilot programs will be expanded to move towards finality and launch of CBDC in India.
CBDC, once introduced, can bring about a plethora of changes in the financial system of the country especially in relation to cross border transactions, reduction in financial burden of printing paper currency and innovation in the fintech ecosystem. It will be imperative for RBI to monitor and learn from global developments and narrow down on best available architecture for execution of CBDC in India.
(This article is co-authored by Nand Gopal Anand (Partner), Harshit Dusad (Senior Associate) and Vrindesh Patel (Associate) at JSA, Advocates and Solicitors. The views expressed here are their own).
