Pilot launch of RBI digital currency set for Q1 of FY23: Senior official

RBI is checking if intermediaries can be bypassed totally, and is also exploring the level of centralisation or decentralisation of the technology

Reserve Bank of India’s (RBI) central bank digital currency (CBDC) may see its first pilot launch in the first quarter of the next fiscal, said a senior central bank official at the State Bank of India’s annual Banking & Economic Conclave on Wednesday.

“I think somewhere it was said that at least by the first quarter of next year a pilot could be launched. So we are bullish on that,” said P Vasudevan, chief general manager at the Dept. of Payment & Settlement of the RBI.

The central bank senior officials had earlier said the work on CBDC was in advanced stage and a soft launch could be expected by December. But the regulator has so far not committed to a firm timeline. The RBI CGM also said there should be no hurry on CBDC.

“We are on the job and we are looking into the various issues and nuances related to CBDC. It's not a simple thing to just say that CBDC can be a habit from tomorrow on,” Vasudevan said, adding CBDCs could have a useful role depending on how it is implemented.

“But for that we need to be very cautious. We have to see whether it should be as a wholesale segment or target the retail segment, and for what purposes as well. And how do we actually have the validation mechanism as it is token based, and also how do you implement it? The banking system has been taking the lead in terms of currency distribution as a tiered model, whether the same model should be accepted for CBDC as well, we will have to see,” Vasudevan said.

"The central bank is also checking if intermediaries can be bypassed altogether, and most importantly, checking if the technology should be decentralized or should be semi-centralised or decentralised,” the RBI CGM said.

He was part of a panel discussing the next decade of digital banking and panel at the SBI conclave. The panelists present were unanimous that the worries of RBI governor Shaktikanta Das about private cryptocurrencies are valid.

“The private cryptos, as you call it ... a lot of it is a fad. Based on, say, corporate superstars’ comments, you see their values going up,” said Parag Rao, country head- payments business, technology and digital Banking, HDFC Bank.

“Having said this, control is extremely important. Because you can't have parallel currencies working where you don't have adequate enough supervision, control and observability,” Rao said.

Ashwini Kumar Tewari, managing director for international banking, technology & subsidiaries, of SBI said indeed there should be more discussion about cryptocurrencies, not just between the RBI and the government, but also in the public domain, while he favoured a middle ground.

“The concerns which are there and being articulated -- whether the control over the cryptocurrencies or even the money itself could be lost, money laundering concerns, all of these are valid concerns. Therefore, does this mean that we totally ban crypto? I think there could be a slightly nuanced view here,” Tewari said.

“If we consider it as an asset class, we can also build in safeguards. A conversation needs to take place between the registries, the players who provide the crypto services, between the bank and the central bank, and let's see how we can take this forward. I'm sure a middle path would surely be found here,” Tewari said.

There are strong cases in favour of CBDCs, the panelists said, but there are challenges too. The CBDC would need a strong framework where the banks would want to operate. The unified payments interface (UPI) is already replacing cash to a large extent. So in that sense, CBDC would complement the UPI. A digital currency ideally should work in an environment where the collaterals and data related to the collaterals are also in digital form, which is not the case right now.

Joydeep Sengupta, senior partner of McKinsey & Co said most major central banks are in the process of introducing digital currencies, and that should be a good way for India too to get into the space. Digital currencies can be a catalyst for financial inclusion, and can reduce the cost of cash in the system significantly.

But decentralized finance is also an attractive proposition where a separate market can be created where consumers can open a secured wallet to store cryptocurrencies.

“You can create liquidity, have high yield deposits, lend against collateralized crypto, and really create effectively a liquid market which could enable financing and more broadly enable growth in the economy,” said Sengupta. However, there should be safeguards. He cited the federated model example of China in which there could be no new players, but existing commercial banks drive the cryptocurrency space. That could also be a good starting point for India, Sengupta said.

Digital currency is also the need of the time, as the covid pandemic has also fundamentally changed the way banking is done in the country.

“We are not going to see a lot of things that we took as normal pre-covid,” said Deepak Sharma, president and chief digital officer of Kotak Mahindra Bank.

“In these 18 months customers have changed the way that they would not have in five years. Customers are now expecting the same kind of convenience in banking that they are used to through Netflix, Amazon etc,” Sharma said, adding, customers are now saying “serve us what I need”, rather than bunched up services before the pandemic. “Digital is the way to do that. You can no longer afford to have downtime in services,” said Sharma.