RBI working on digital currency, pilot projects likely in near future: Dy Governor

New Delhi: The RBI is working on phased introduction of its own digital currency and is mulling pilot projects in wholesale and retail segments in the near future, Deputy Governor T Rabi Sankar said on Thursday.

He also said several countries have implemented specific purpose Central Bank Digital Currencies (CBDCs) in the wholesale and retail segments.

A CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.

Sankar said developing a domestic CBDC could provide the public with uses that any private virtual currency (VC) offers and to that extent might retain public preference for the rupee.

"It could also protect the public from the abnormal level of volatility some of these VCs experience," he said while participating in an online discussion organised by The Vidhi Centre for Legal Policy.

Introduction of CBDC, he said, has the potential to provide significant benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs and reduced settlement risk.

"Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits," he said.

The Deputy Governor said it would be the RBI's endeavour, "as we move forward in the direction of India's CBDC", to take the necessary steps which would reiterate the leadership position of the country in payment systems.

He said CBDCs are likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation.

Sankar stressed that drawing board considerations and stakeholder deliberations are important, while technological challenges have to be looked at as well.

"RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption," he said.

Some key issues under RBI's examination include, the scope of CBDCs, the underlying technology, the validation mechanism and distribution architecture.

"However, conducting pilots in wholesale and retail segments may be a possibility in near future," the Deputy Governor said.

Sankar further said legal changes would be necessary as the current provisions have been made keeping in mind currency in a physical form under the Reserve Bank of India Act.

He said consequential amendments would also be required in the Coinage Act, Foreign Exchange Management Act (FEMA) and Information Technology Act.

"As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is near," he remarked.

He also highlighted some the risks associated with digital currencies, like sudden flight of money from a bank under stress.

"There are associated risks...but they need to be carefully evaluated against the potential benefits," he added.

The finance ministry, in 2017, had set up a high level inter-ministerial committee to examine the policy and legal framework for regulation of virtual / crypto currencies. It had recommended the introduction of CBDCs as a digital form of fiat money in India.

The RBI has also been exploring the pros and cons of introduction of CBDCs since quite some time.