By KS Roshan Menon
It is increasingly likely that India will soon roll out a Digital Rupee. The early groundwork for trialling an indigenous Central Bank Digital Currency (‘CBDC’) – money that is legal tender and issued digitally by a central bank – was laid out in an Inter-Ministerial Committee Report recommending a near blanket ban on using cryptocurrencies in India. The idea has since gained greater policy momentum, with the Reserve Bank of India’s (‘RBI’) Deputy Governor admitting the central bank’s role in devising a phased implementation strategy for CBDCs. In a keynote address, the Deputy Governor roughly sketched out the broad contours of this strategy: to issue a minimally disruptive Indian CBDC that re-affirms India’s position as a global leader in the payments systems industry.
The importance of an enabling legal framework for issuing CBDCs cannot be overstated in realising this policy objective. Curiously, however, policymakers have seemingly sidestepped a key regulatory concern for CBDC issuance. Despite robust discussion on the need for appropriate design paradigms for CBDCs, regulators have failed to acknowledge that a specialised mechanism may need to be set up for the purpose of issuing such currency. The operationalisation of this mechanism – one akin to a sovereign digital mint – requires careful regulatory scrutiny.
The making of physical money in India is divided into two, neat regulatory membranes. While the provisions of the RBI Act, 1934 empower the RBI to act as the sole issuer of banknotes, the Indian government regulates the minting of coins. The provisions of the Coinage Act, 2011 apply to such minting. A look at the issuance frameworks contained within these laws and related policy documents shed light on the responsibilities that a mint must discharge – maintain the integrity of issued currencies, review extant issuance practices and guard against fraud.
These responsibilities acquire new dimensions in the era of digital currency, as a mint becomes the first mover on concerns relating to interoperability, cybersecurity and accessibility. A well-built digital mint therefore absorbs a mesh of policy objectives; it must create digital currencies that complement extant payment instruments, embrace security-by-design and promote accessibility. Achieving this requires precise policy design, with technological resilience and respect for individual rights at the core of an Indian CBDC law.
In building a framework that values the above mentioned objectives, I recommend three regulatory interventions. First, regulators must account for technological obsolescence. Several technological implements used in trialling virtual currencies have evolved considerably. Blockchain for instance, is now in its third generation. Many other open-source financial tools have experienced similar churn, with platforms committed to evolving newer paradigms of trust, security and interoperability. Tracking these paradigms and issuance strategies for new virtual currencies can ensure that India minimises the tech-risk involved in dealing with a CBDC.
Second, regulators must build consensus on novel regulation for counterfeiting. A paper by the Brookings Institution has indicated that CBDCs run the risk of electronic counterfeiting, with weaker systems prone to hacking. This finding is particularly worrying in light of the alarming number of cybersecurity attacks targeting India’s financial sector. India reported an estimated 1.16 million cyberattacks in 2020, a 300% increase from the reported figures in 2019. Data breaches in the banking sector stood at 2.9 lakh, indicating the need to build robust cybersecurity capabilities for the sector.
While the RBI has devised regulatory strategies to counter cyber-harm among financial entities, it is reasonable to say that it can do little in instances where regulation does not explicitly identify harmful activity. Simply put, if there is no law that outlines the nature and scope of activities classified as electronic counterfeiting for CBDCs, it is incredibly difficult to apprehend persons for such counterfeiting. It is in this context that the extant law requires an update, with language introduced to contextualise counterfeiting in terms of CBDC issuance.
Third, the mint must make CBDCs accessible-by-design.
Due to their digital nature, scholars have rightly feared that CBDC access may be denied to those who fall on the oppressed side of the digital divide. The adoption of bank-led issuance and holding mechanisms manifest additional concerns – such issuance may exclude 190 million unbanked Indians from holding CBDCs. In a climate where smartphones and digital wallets may become a precondition to access CBDCs, the mint must think of building capacities to create inclusive digital currency.
A mosaic of policy measures can create inclusive CBDCs. However, due to the nascent nature of the debate on their issuance, baby steps are advisable. Early preparatory work, notes a paper published by the Federal Reserve Bank of Kansas City, may involve identifying non-financial institutions that can support CBDCs and studying hardware solutions – such as prepaid cards – that may enable smartphone-less issuance to end-users. Ultimately, access-by-design paradigms should think of seamless complementarity; paying or receiving CBDCs should be as convenient as paying or receiving cash.
It is important to afford latitude to the above-discussed measures, and build from the principles they prize. Accessibility, security and technological dynamism must shape regulatory attitudes towards CBDC issuance in India. In delineating some of the interventions necessary for building a strong mint, one hopes that Indian CBDC issuance navigates the technological and legal hurdles that may deter it from becoming an innovation leader in this space.
(KS Roshan Menon is a Research Fellow at Shardul Amarchand Mangaldas & Co. The author is grateful to Veena Sivaramakrishnan, Shilpa Mankar Ahluwalia and Siddharth Nair for their inputs. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Further, the views in this article are the personal views of the author.)