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Digital Rupee: India to Play Pivotal Role Globally

The concept of digital cash, as imagined by David Chaum first in 1983, based on the cryptographic principles of privacy and security, has evolved significantly over the years and has paved the way for research and development and innovation in digital and crypto currencies. They introduced new technology-enabled characteristics like decentralised consensus mechanisms and scalability, […]

The concept of digital cash, as imagined by David Chaum first in 1983, based on the cryptographic principles of privacy and security, has evolved significantly over the years and has paved the way for research and development and innovation in digital and crypto currencies. They introduced new technology-enabled characteristics like decentralised consensus mechanisms and scalability, which could become essential for new CBDCs issued by central banks globally. 

Central banks worldwide have closely monitored the developments in virtual and cryptocurrency for many years before developing plans to issue sovereign digital currency. A CBDC leverages the latest technological innovations to potentially safeguard liquidity and transaction risk. However, its use was still in question for many years because most of the proposed functionalities of a CBDC were already easily achieved by using a sophisticated digital payments system, especially for a country like India, which has highly developed digital payment channels. A central bank’s core directive to provide robust and adaptable means of payment must be at the core of CBDC introduction plans. 

The need for a CBDC essentially changed with the onset of stablecoins. Due to their volatility, private cryptocurrencies were never considered a threat to national currencies. Stablecoins, such as Tether and USD coin, changed that by providing price stability through a 1:1 backing to fiat currency. Dollar-pegged stable coins have showcased safe asset qualities with their prices rising above the peg only during periods of extreme market distress. The rise of stablecoins could easily be perceived as a threat to a sovereign currency and a central bank’s ability to control and dictate monetary policy. 

The global CBDC landscape is nascent despite countries accounting for 90 percent of global GDP either developing, piloting, or gradually implementing digital currencies in their respective nations. China’s digital RMB was the first digital currency launched by a major economy along with CBDC projects by the Central Bank of Nigeria (e-Naira), the Bank of Bahamas (Sand Dollar), the Eastern Caribbean Central Bank (DCash), and the Bank of Jamaica (JamDex). 

Assuming the G20 presidency in November 2022, India is uniquely positioned to lead the way, to experiment, and to provide recommendations to several countries as they grapple with growth of CBDCs and the incidental risks and regulations. Like most central banks around the world, the RBI is still treading cautiously while designing and launching the digital rupee as the dominant model for CBDCs is still unclear, if at all there is one. The exact characteristics of the digital rupee are still unclear; however, it is an excellent opportunity to prescribe solutions for fundamental concerns of CBDCs, such as anonymity and interoperability. The RBI could also create frameworks to ensure anonymity and protect transaction data by creating a data trust that would facilitate data sharing for further policy design. 

The digital rupee is unlikely to be interest-bearing and will simply be a digital version of the paper currency. The retail CBDC is a direct liability of the Central bank, like physical cash, which will be available to the private sector, non-financial consumers, and businesses. 

The evolving CBDC space poses more questions than answers in terms of currency design and implementation strategies. The introduction of the digital rupee would have repercussions for the structure of payment and financial markets and, subsequently, for individuals and businesses. Due to India’s inherent market intricacies and socio-economic conditions, all stakeholders must consider the advantages and disadvantages of the new digital currency. By leveraging the latest technology, central banks can safeguard the finality of transactions, like physical cash and unlike stablecoins or any private cryptocurrency. But in the process, it must adhere to anonymity and data security principles, which, according to David Chaum, is essential for any democracy. 

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