In the Reserve Bank of India’s annual report published on Friday, a phased introduction of a central bank digital currency (CBDC) is on the central bank’s schedule for the current financial year to March 2023. Progress on a digital rupee is subject to the outcome of a risk-based model for KYC and anti money laundering (AML) supervision.
Legislation to provide the framework to support a CBDC has already been enacted. In February, Finance Minister Nirmala Sithara announced plans to issue a digital rupee that uses blockchain and other technologies by March 2023. At the time, she gave the motivations as boosting the digital economy and managing currencies more efficiently.
Notably within the annual report, CBDC fell under the section on “regulation, supervision and financial stability” rather than payments. India already has efficient payment systems such as UPI, so that’s not the primary motivation.
“The design of CBDC needs to be in conformity with the stated objectives of monetary policy, financial stability and efficient operations of currency and payment systems,” says the annual report. “The Reserve Bank proposes to adopt a graded approach to introduction of CBDC, going step by step through stages of Proof of Concept, pilots and the launch.”
Crypto popularity drives urgency
Some central banks see a CBDC as an antidote to cryptocurrencies. While crypto can provide an alternative payment mechanism, the current appeal of crypto is often for investment and speculation. One of the reserve bank’s previously stated concerns is crypto can be used to skirt income taxes if the payments don’t go via the banking system. As we previously reported, India appears to be the country where the largest proportion of citizens is receptive to digital currency.
The reserve bank has had a controversial relationship with the crypto sector. It blocked banks providing services to cryptocurrency exchanges, but the Supreme Court of India overturned that position in March 2020. Nonetheless, this month Coinbase cited “informal pressure” from the central bank as a reason for halting its Indian service shortly after launching it in April. Coinbase’s app supported people using the UPI payment system to buy tokens, but the payment system operator said it was not aware of any cryptocurrency operator using UPI.
Since the Supreme Court’s ruling, India was ranked second by Chainalysis for cryptocurrency adoption in 2021. A large proportion of the activity – 42% in value terms – involves “institutional” transfers of more than $10 million.