The Reserve Bank of India (RBI) on Monday said it will launch central bank digital currency (CBDC), or the digital rupee, on a pilot basis on Tuesday. The RBI has selected nine banks – State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC – for issuing the digital currency for transactions in government securities.
In its first pilot, the central bank has allowed use of digital rupee to settle secondary transactions in the government securities (G-Sec) market, the RBI said in a statement.
The RBI has plans to launch the digital rupee in the retail segment in a month in select locations and for closed user groups comprising customers and merchants, the central bank said, adding that it will issue operational guidelines for retail use in due course.
The CBDC can be classified into retail and wholesale categories, depending on the use and access, the central bank said. While retail CBDC can be used by consumers and businesses, the wholesale currency can only be accessed by financial institutions. The RBI has plans to explore use of wholesale CBDC for over-the-counter transactions, commercial papers (CP) and certificate of deposits (CD).
The RBI said retail purchase of securities such as G-Secs, CPs, CDs can be done by issuing tokens and bypassing the bank account route. If tokenised, the CBDC can be extended to non-residents to investment in domestic asset classes, it said.
The RBI is exploring the option of implementation of account-based CBDC in wholesale segment and token-based CBDC in retail segment, based on the recommendations of a internal working group. The central bank is testing various aspects, including suitability of technology architecture, security of token issuance and central bank node, standards and protocols to be followed by each stakeholder, prevention of counterfeits and security considerations, especially in offline transactions.
Reducing the cost of physical cash management, further digitisation, bringing efficiency and innovation in payments, supporting financial inclusion, improving cross-border transactions and preventing unwarranted rise of crypto assets are the triggers behind the launch of digital currency.
“Further, developing CBDC could provide the public a risk-free virtual currency that will provide them legitimate benefits without the risks of dealing in private virtual currencies,” the RBI said. “Thus, safeguarding the trust of the common man in the Indian Rupee vis-à-vis proliferation of crypto asset is another important motivation for introducing CBDC.”