News & Analysis

Four PSU Banks May Run Digital Currency Pilot

The Reserve Bank of India is reportedly consulting with a US fintech company ahead of a possible rollout in the current financial year

Having regularly upbraided the digital currencies in the past, the Reserve Bank of India (RBI) appears to have bitten the bullet and could be launching its own Central Bank Digital Currency or CBDC as early as over the next six months. The central bank is reportedly consulting with a US fintech company and asking four PSU banks to run a pilot soon. 

The information came from the US fintech company FIS with senior director Julia Demidova telling MoneyControl that the group has various engagements with the RBI Innovation Hub where the connected ecosystem could be extended to them for experimenting with various CBDC options. 

The report suggested that a possible rollout of the digital currency may happen within the current financial year, which means over the next six months. For now, the US fintech company has been holding discussions and workshops with central banks across the world on the launch of digital currencies. 

The company reportedly advises central banks on their digital currencies and associated topics such as offline payments, programmed payments, a possible monetary policy toolkit, interest bearing digital currencies, fractional banking issues, financial inclusion and cross-border payments through digital currencies, says the article. 


What’s the RBI’s digital currency? 

Just like paper currency wherein the central bank promises to pay the bearer the mentioned amount, a central bank digital currency is the sovereign equivalent of existing crypto currencies such as the Bitcoin or Ethereum. However, unlike these currencies that are mined and generated and fully decentralized, the CBDC is controlled by the country’s central bank. 

India’s date with a CBDC began in 2017 though the project development actually began only about a year ago. In fact, Finance Minister Nirmala Sitharaman had told Parliament earlier this year that an Indian CBDC would materialize this financial year itself. The RBI had proposed an official digital currency while steadfastly opposing the private ones in circulation. 

Readers would also remember that the RBI Act of 1934 was amended on July 20, thus enabling the conduct of a pilot launch and the eventual rollout of the digital currency. It is learnt that the RBI is also working on a phased implementation of the CBDC across both wholesale and retail segments, according to an official at the RBI. 

Ms. Sitharaman had also highlighted the “clear advantages in a central bank driven digital currency because in this day and age, bulk payments happening between countries, large transactions between institutions and large transactions between central banks themselves of each country are all better enabled with digital currency.”


There’s a need for global expertise to launch

That the RBI was seeking technology assistance from overseas indicates that they’re indeed serious about the rollout. The FIS official confirmed that the company was capable of handling both wholesale and retail digital currency transactions with banks also being able to test and tokenize central bank money into digitally regulated currency. 

Just so that readers are clear, the CBDC is backed by India’s currency regulator and is stored in a digital format. It can be converted into paper currency and would reflect on RBI’s balance sheets, thus ensuring its status as legal tender. The central bank could use blockchain technology to develop the CBDC with SBI, PMB, Union Bank and Bank of Baroda reportedly getting shortlisted to launch the pilot. 


Why it was only a matter of time

Given the increasing levels of acceptance around services such as the UPI, it was only a matter of time before the RBI was forced to shift focus from paper currency to its digital equivalent. Either that, or allow private ones such as Etherum or Bitcoin, which the RBI has opposed on grounds that it could present national security issues. 

In fact, there is a move among the central banks of the world to take a long hard look at the cryptocurrency business, given the risks associated with their usage such as anonymity and the lack of central oversight. In recent times, instances of frauds and data break ins have added to the concerns around private currencies. 

From India’s point of view, the issuance of a CBDC will encourage financial inclusion while also ensuring that fraud and money laundering get minimized. It would also result in the right sort of infrastructure being set up with built-in monitoring options well before the digital currency reaches the general public. 

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