RBI to consider launching digital currency

The Reserve Bank of India is to investigate the possibility of issuing a central bank digital currency, work that comes alongside measures to separate the banking sector from private crypto tokens.

Deputy governor BP Kanungo unveiled the plans at the RBI’s monetary policy press conference today (April 5), saying a working group will be formed to assess the “feasibility and desirability” of issuing a central bank digital currency.

Though he gave only scant details of the plans, Kanungo suggested an Indian central bank digital currency could circulate alongside physical cash, implying the RBI is at least willing to consider issuing CBDC to the general public. “It also holds the promise of reducing the cost of printing notes,” he said.

CBDC is often divided into retail and wholesale versions. The wholesale CBDC would be offered to a limited selection of trusted counterparties as a means of facilitating settlement. A retail currency could entail much more significant changes to the financial system, as it would likely require customers to hold digital accounts at the central bank.

Recent analysis by the Bank for International Settlements suggested wholesale uses for CBDC were the more promising avenue, and could improve monetary policy transmission. The report warned retail versions could undermine the banking system by allowing rapid flight to safety at the central bank in the event of stress.

The RBI is a long way from issuing either type of CBDC, but Kanungo stressed the positives: “Blockchain technology … has potential benefits for financial inclusion and enhancing the efficiency of the financial system.”

‘Ring fencing’ crypto

In the same announcement, Kanungo revealed the RBI planned to “ring fence” the regulated banking system against the proliferation of private forms of crypto token.

The RBI has already sought to warn consumers of the risks associated with highly volatile crypto tokens, such as bitcoin. It now expects banks to sever their ties with any businesses dealing in crypto tokens.

Kanungo said such tokens can “seriously undermine” anti-money laundering efforts, affect market integrity and could endanger financial stability “if they grow beyond a critical size”.

The RBI’s monetary policy committee kept the policy rate on hold at 6% following today’s meeting.