The Reserve Bank of India on Friday said it will soon commence a pilot launch of the Digital Rupee (e₹) for specific use cases. RBI also released a concept note on Central Bank Digital Currency (CBDC), which examines the implications of introduction of CBDC on the banking system, monetary policy, financial stability, and analyses privacy issues. 

The e₹ will provide an additional option to the currently available forms of money, the banking regulator says, adding that it is substantially not different from banknotes, but being digital it is likely to be easier, faster and cheaper.

This comes at a time when the rapid mushrooming of private cryptocurrencies in the last few years has attempted to challenge the fundamental notion of money. Claiming the benefits of decentralisation, cryptocurrencies are being hailed as innovation that would usher in de-centralised finance and disrupt the traditional financial system. 

However, the inherent design of cryptocurrencies is more geared to bypass the established and regulated intermediation and control arrangements that play a crucial role of ensuring integrity and stability of the monetary and financial ecosystem, the RBI says.

RBI says it has been exploring the pros and cons of introduction of CBDCs for some time and is currently engaged in working towards a phased implementation strategy, going step by step through various stages of pilots followed by the final launch, and simultaneously examining use cases for the issuance of its Digital Rupee (e₹), with minimal or no disruption to the financial system.

"Currently, we are at the forefront of a watershed movement in the evolution of currency that will decisively change the very nature of money and its functions," the RBI says.

The Reserve Bank broadly defines CBDC as the legal tender issued by a central bank in a digital form. The key motivations for exploring the issuance of CBDC in India include reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency, and innovation in payments system, adding efficiency to the settlement system, boosting innovation in cross-border payments space and providing public with uses that any private virtual currencies can provide, without the associated risks.

The RBI says a wider proliferation of cryptocurrencies could pose a serious challenge to the stability of the financial system of the country. 

"It is the responsibility of the central bank to provide its citizens with a risk free central bank digital money which will provide the users the same experience of dealing in currency in digital form, without any risks associated with private cryptocurrencies. Therefore, CBDCs will provide the public with benefits of virtual currencies while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies," says the banking regulator.

CBDCs would not be "mined" as is understood in the context of private cryptocurrencies, wherein, any individual can compete to mine and create the cryptocurrency, the RBI says. In the case of CBDC, it will only be the central bank that would be authorised to issue the CBDC.

The central bank says the unabated use of crypto assets can be a threat to the monetary policy objectives as it may lead to creation of a parallel economy and will likely undermine the monetary policy transmission and stability of the domestic currency.

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