Post Date: Post Date – 12:40 AM, Wednesday – Nov 2
India’s digital financial system has taken a major leap forward as the Reserve Bank of India (RBI) launched its first pilot digital currency, or e-rupee, but privacy concerns remain unresolved. In the first phase, the wholesale version of the digital currency has been launched with the participation of nine banks, while the retail e-rupee, which is closely related to ordinary people, will be ready for launch within a month. For all practical purposes, a central bank digital currency (CBDC) would be equivalent to cash. It is expected to complement the current plethora of digital payments, but not cannibalize them. Privacy concerns arise as a CBDC system would allow governments and intermediaries to access personal data. In the absence of strong data protection laws, the need for data protection and governance standards when designing and implementing a CBDC will be critical. While the concept note issued by the central bank emphasizes privacy principles, it does not enumerate the principles that underlie the design of a CBDC. The RBI needs to balance the need for privacy protection while ensuring adequate oversight to protect the financial integrity of transactions. In the proposed model, retail customers would hold their CBDC through wallets with intermediaries (banks). Banks will be responsible for ensuring on-demand supply of CBDC to consumers. CBDC needs to be integrated into Indian payment systems such as UPI and digital wallets.
Interoperability between these payment systems is critical to the success of the digital economy. Since CBDC will use cryptography, it will make the system more secure compared to existing payment infrastructure. Amendments to existing laws such as the RBI Act of 1934, the Coinage Act of 2011, the Foreign Exchange Control Act of 1999 and the Information Technology Act of 2000 may be required to create a favorable legal framework for CBDC. Digital currencies are gaining more and more attention around the world, with as many as 105 countries currently exploring different digital currency models. The difference between RBI’s digital currency and the traditional rupee when conducting digital transactions is that it is based on blockchain technology. This provides a level of transparency and security for CBDC transactions that even exceeds the existing digital security of the Indian banking system. Finance Minister Nirmala Sitharaman announced in her budget speech that the Reserve Bank of India will issue a digital currency this year in a major boost to the digital economy. Central banks have been looking to launch CBDCs to counter the threat cryptocurrencies pose to financial stability. It is hoped that the e-rupee will help support India’s digital economy, enhance financial inclusion, and make money and payment systems more efficient and transparent. However, in a country where cash is king, digital currency cannot replace paper money.
