RBI in talks with 4 banks, fintechs for digital currency launch this financial year

The Reserve Bank of India (RBI) is holding consultations with a clutch of fintech companies and is said to have asked four public sector banks to run a pilot Central Bank Digital Currency (CBDC) project ahead of a possible rollout this financial year.

The list of fintechs  that the RBI is consulting include US-based FIS which has been holding roundtable conferences and workshops with central bankers globally on CBDCs.

The fintech company is advising central banks on CBDC topics such as offline payments, programmable payments, new monetary policy toolkit, interest-bearing CBDC, fractional banking issues, financial inclusion, and cross-border CBDC payments, Demidova said.

“FIS has had various engagements with the RBI...and, of course, our connected ecosystem could be extended to the RBI to experiment various CBDC options,” Julia Demidova, senior director at FIS, told Moneycontrol on September 2.

“Whether it is a wholesale or retail CBDC transaction, our technology can also be extended to commercial banks where they can test and tokenise central bank money in the form of digital regulated money,” Demidova added.

Legal status

CBDC is a currency that is backed by the regulator and stored in a digital format. It can be converted into paper currency and will reflect on the RBI’s balance sheet, thereby granting it legal tender status.

The RBI could use blockchain technology to develop its CBDC, with adequate regulations, experts said.

Additionally, the RBI has roped in four state-run banks to run a pilot CBDC project, according to two bank officials.

“The RBI has asked State Bank of India, Punjab National Bank, Union Bank of India and Bank of Baroda to run the pilot internally,” the official said, requesting anonymity.

Queries sent by Moneycontrol to the RBI, SBI, BoB and Union Bank for comments on the pilot CBDC project did not elicit a response by the time of publishing.

Another senior PSU bank official, however, confirmed the matter.

“There is a pilot on CBDCs. The RBI may come with the launch this year. When it will exactly roll out the product and specifications is to be seen,” the banker said.

According to Vikram Babbar, a partner and lead of financial services at EY, products like the Unified Payments Interface (UPI) gained momentum and have paved the way for the digital currency.

While cryptocurrencies have been in use for some time globally, the risks associated with their usage, including anonymity and the lack of a central agency backing, have been at the forefront and have attracted more frauds and financial crime incidents recently, he said.

To mitigate some of the risks, central banks and regulators like the RBI have planned to launch a fiat digital currency, he added.

“From an Indian standpoint, CBDC would further support financial inclusion and at the same time ensure that the risk of fraud and money laundering is minimised. This would additionally entail setting up the right infrastructure and monitoring mechanisms before the formal launch. For a country like India, testing with a pilot launch and planning a phased implementation may be an apt start,” Babbar said.

Act amended

On July 20, Ajay Kumar Choudhary, executive director at RBI, said that with the announcement of the CBDC launch in the Union Budget, the RBI Act of 1934 had been amended to enable the RBI to conduct the pilot project and subsequently issue the CBDC.

“The RBI is also working on phased implementation of a CBDC in both the wholesale and retail segments,” he added.

The ED’s comments are in line with finance minister Nirmala Sitharaman’s statement on March 8, when she was quoted by PTI as saying, “It was a conscious call taken in consultation with the central bank – the Reserve Bank of India.... we would like them to design it the way they would like to do it, but this year we expect the currency to come out from the central bank itself.”

The finance minister had also said there are “clear advantages in a central bank driven digital currency because in this day and age, bulk payments happening between countries, large transactions between institutions and large transactions between central banks themselves of each country are all better enabled with digital currency.”