India taking first steps towards a digital rupee to fight ‘private’ virtual currencies

India’s central bank is mulling taking the first steps towards what might eventually be the country’s central bank digital currency (CBDC). A top-ranking official at the bank revealed that the government is looking at a digital rupee to protect users from the influence of private virtual currencies and the consequent power they give to the U.S. dollar.

Rabi Sankar, the deputy governor at the Reserve Bank of India (RBI) revealed in a speech on Thursday that the central bank has been working on a digital rupee. He pointed to the need for India to keep pace with other major economies in financial innovation, especially with 86% of central banks researching CBDCs according to a study by the Bank for International Settlements.

The central banker acknowledged that India has one of the world’s most advanced, affordable and robust payment systems. However, a CBDC might be necessary for India to protect the sovereignty of the rupee.

India’s payment system, while quite advanced, is still dominated by cash payments, especially for payments below 500 rupee (about $7). However, according to the banker, this dominant cash market can easily convert to CBDCs if it offers the same features and convenience.

For India, the need for a CBDC goes beyond just advancing its payments system, the executive stated in his speech at a webinar organized by the Vidhi Centre for Legal Policy, New Delhi. Sankar believes that the country needs a digital rupee to counter the rise of private virtual currencies.

He told the virtual audience, “The advent of private virtual currencies (VCs) may well be another reason why CBDCs might become necessary… If these VCs gain recognition, national currencies with limited convertibility are likely to come under threat.”

The rise of ‘private virtual currencies’ also presents another challenge, the rise in prominence for the U.S. dollar.

“To be sure, freely convertible currencies like the U.S. Dollar may not be affected as most of these VCs are denominated in U.S. dollar. In fact, these VCs might encourage the use of U.S. dollar,” he stated. “Indeed, this could be the key factor nudging central banks from considering CBDCs as a secure and stable form of digital money.”

Sankar revealed that the RBI has been exploring the pros and cons of CBDCs for quite some time now.

He further revealed, “Going forward, after studying the impact of these models, launch of general purpose CBDCs shall be evaluated. RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption.”

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