India’s Central Bank Confirms Working on State-Backed Digital Currency

India is exploring a rupee-backed central bank digital currency (CBDC) in a bid to reduce the costs associated with physical money and keep up with the changing global landscape of digital payments, the Reserve Bank of India (RBI) revealed on Wednesday.

“[A]n inter-departmental group has been constituted by the Reserve Bank to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency (CBDC),” the RBI said in its latest annual report, confirming recent media reports.

The central bank further explained that the impetus behind its move came from “rapid changes” in the global payments industry as well as the “emergence of private digital tokens and the rising costs of managing fiat paper/metallic money”. According statistics cited by the Economic Times, the cost of printing paper note in India was INR 6.3 billion ($89 million) for the financial year 2018.

It remains unclear whether the CBDC will be blockchain-powered, but there is a high chance, considering the central bank’s positive stance on the distributed ledger technology (DLT). The monetary regulator said in the report that the DLT utilization in payment and settlement solutions “holds the promise of significant economic benefits in future”. Despite this upbeat view, India remains resistant to lift the current ban on cryptocurrencies.

In April, the RBI issued a circular, which stated that all banks, financial institutions and other entities that come under its regulation would not be allowed to “deal with or provide services to any individual or business entities dealing with or settling [cryptocurrencies]”. The move triggered a series of petitions filed by crypto exchanges and businesses in the country. Recently, the Supreme Court deferred the final hearing on the ban, originally scheduled for July 20, until September.

The restrictions, which took effect on July 5, have also forced local crypto exchanges to look for alternative revenue models, including shifting their focus towards peer-to-peer trading. The RBI made a warning note on the matter:

"Developments on this front need to be monitored as some trading may shift from exchanges to peer-to-peer mode, which may also involve increased usage of cash. Possibilities of migration of crypto exchange houses to dark pools/cash and to offshore locations, thus raising concerns on Anti Money Laundering (AML)/Combating the Financing of Terrorism (CFT) and taxation issues, require close watch."