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India to launch central bank digital currency in 2022/23

By Anoop Agrawal


Updated

Businessmen and women sit around a board table looking at a graphic that includes the letters CBDC
India to launch central bank digital currency in 2022-2023 – Photo: Shutterstock

After holding back for a couple of  years, India will launch its own version of a digital currency later this year, Finance Minister Nirmala Sitharaman told lawmakers on Tuesday while presenting the federal budget.

“Introduction of a central bank digital currency will give a boost, a big boost to the digital economy,” Sitharaman said as she delivered the country’s annual budget. “Digital currency will also lead to a more efficient and cheaper currency management system.”

The Reserve Bank of India (RBI), the nation’s central bank, will introduce the digital currency in the 2022/23 financial year which begins on 1 April. The digital currency, details of which were not revealed by the minister, will be developed “using blockchain and other technologies”.

“Industry stakeholders will certainly appreciate the introduction of a centralised digital currency by the government as it promotes a reliable and alternate payment tender,” said Probir Roy Chowdhury, a partner at Mumbai-based law firm J Sagar Associates.

Trials to start by year-end

Once introduced, India would be among the world’s earliest large economies to establish a central bank digital currency (CBDC).

“Introduction of a CBDC leveraging blockchain technology will influence the digital transactions and hence its implementation process will be something to pay attention to,” said Madhusudan Ekambaram, co-founder and chief executive officer of financial services platform KreditBee.

RBI governor Shaktikanta Das said in August last year that the central bank could first launch digital currency trial programmes by December 2021. He had said that it was evaluating the security aspects, implications on the financial sector, and impact on the monetary policy and currency circulation in the run-up to the introduction of digital currency.

The central bank was considering the introduction of digital currency in 2020 as the coronavirus pandemic triggered a fall in cash transactions and increased interest in cryptocurrencies like bitcoin.

A recent Bank of America report said a US CBDC would differ from the digital money available currently as it would be a liability of only the US Federal Reserve, that country’s central bank.

India follows China in launching CBDC

India will join bigger neighbour China in experimenting with its own digital currency. The Asian giant China, the second-largest economy in the world, was the first country to experiment with digital currency with an introduction back in 2014.

According to a World Economic Forum report in September last year, 139 million people had used China's digital yuan app on mobile, as the nation intensified digitisation of its economy. Residents of the country’s major cities could access electronic-yuan wallets on their mobile devices.

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In April 2021, China had included more regions in its trial for the digital yuan, officially known as the Digital Currency Electronic Payment (DCEP), expanding the scope of testing to 11 pilot areas and cities, and also to venues for the February 2022 Beijing Winter Olympics.

“The PBOC People’s Bank of China will continue to prudently advance the pilot e-CNY R&D project in line with China’s 14th Five-Year Plan, with no preset timetable for the final launch,” is the Chinese central bank’s official stated position as of July 2021.

While China hasn’t announced an official launch date yet, the digital yuan is expected to be the first major CBDC to see the light of the day soon.

Last year in September, Tajikistan announced the creation of a CBDC with the Fantom Foundation while Nigeria was the first African nation to launch its CBDC shortly afterwards in October.

Contours of the currency

Experts in India believe the pricing and contours of the proposed digital rupee will be regulated and controlled by the government in order to avoid volatility – with any tender issued by the government or the RBI. They also suggest that the government may not give recognition to any other form of currency in any mode. In doing so, the use of cryptocurrency would be prevented in settlement of any transactions.

“The introduction of its own digital currency will prevent market players from entering into several digital transactions that require other kinds of cryptocurrencies. Hence, the only way to bridge this gap would be if the government came up with a set of regulations to govern all kinds of digital currencies in use in India, instead of a sole government-controlled currency.” Roy of J Sagar Associates said.

Local brokerage ICICI Securities, part of the ICICI financial services conglomerate, said in a note in December that it estimated the global cryptocurrency market size to be $2.6trn and in India at about $15bn.

“As markets have been focusing on fintechs as the future of the Indian financial industry, new age initial share sales are throwing newer opportunities. Digital currency has remained the talk of the town. Digital currency (encrypted form) has been garnering attention of the investor community,” ICICI Securities said in its note.

Portrait of Kavitha Subramanian, co-founder, UpstoxKavitha Subramanian, co-founder, Upstox

Crypto clear

The Indian government has attempted to discourage growth of the private cryptocurrency market and simultaneously tried to establish a framework for creating a CBDC. That has been with some exceptions to promote the underlying technology of cryptocurrency and its uses. The statement in the budget has been the most explicit on record.

"The Finance Minister has presented a digital-first budget that focuses on quick, holistic, and inclusive economic growth. The focus on start-ups and fintech in this year's Budget is a fantastic step that will help these sectors grow further. The CBDC will help to enhance the digital economy by making currency management more efficient and less expensive,” said Kavitha Subramanian, co-founder of Upstox, a digital platform for financial investments in India.

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