Page 46 - Banking Finance December 2021

ARTICLE

purposes are likely to sweep day end balances to Legal Framework:
interest-earning deposit accounts.
i. The introduction of CBDC would require a legal
framework as current legal provisions are made keeping
CBDC and Technology Risk: in mind currency in paper form. However CBDCs are
i. CBDC ecosystems may be at similar risk for cyber-attacks conceptually similar to bank note.
as the current payment systems. In countries with lower
ii. Under the Reserve Bank of India Act, 1934, the Bank is
financial literacy levels, the increase in digital payment
empowered to regulate the issue of bank notes and the
related frauds may also spread to CBDCs.
keeping of reserves with a view to securing monetary
ii. The country which is dealing with the CBDC must have
stability in India. This will also help to operate the
high label of cyber security and financial literacy. currency and credit system of the Bank.
iii. Absorption of CBDCs in the economy is also subject to
technology preparedness. iii. The Reserve Bank derives the necessary statutory
powers from various sections of the RBI Act - with
iv. The creation of population scale digital currency system respect to denomination (Section 24), form of banknotes
is contingent upon evolution of high speed internet and (Section 25), status as legal tender (Sec 26(1)) etc.
telecommunication networks and ensuring the wider
reach of appropriate technology to the general public iv. There is a need to examine consequential amendments
for storing and transacting in CBDCs. to other Acts like The Coinage Act, 2011, FEMA, 1999,
Information Technology Act, 2000 etc. Even though
v. In developing countries, lower level of technology
CBDCs will be a primarily technology driven product, it
adoption may limit the reach of CBDCs and add to will be desirable to keep the legislation technology
existing inequalities in terms of accessing financial
neutral to enable coverage of a variety of technology
products and services.
choices.

RBI's approach on CBDC:
Conclusion:
i. The High Level Inter-Ministerial Committee constituted
The emergence of CBDC is laced with numerous benefits
by Ministry of Finance, Government of India to examine
with far reaching positive effects. This may be less reliance
the policy and legal framework for regulation of virtual/
on cash, lower transaction cost and lower settlement risk.
crypto currencies had recommended the introduction
Also the introduction of CBDC will likely to lead the more
of CBDCs as a digital form of fiat money in India.
robust, efficient, reliable, regulated and legal tender-based
ii. RBI has also been exploring the pros and cons of payment option. However the risk is associated with the
introduction of CBDCs since quite some time. CBDC show there is a need of evaluation for the potential
iii. RBI is currently working towards a phased benefits. If India moves towards CBDC naturally it will get
implementation strategy and examining use cases which the leadership position in payment system.
could be implemented with little or no disruption. Some
key issues under examination are as under: CBDCs are not only desirable in payment systems benefits,
a) The scope of CBDCs - whether they should be used but also protect the general public from the dire
in retail payments or also in wholesale payments. consequence of private virtual currency. Off course this
would require the careful calibration and a nuanced
b) The underlying technology - whether it should be a
approach in implementation. For the implementation of
distributed ledger or a centralized ledger.
CBDC we require board views and stakeholder consultations
c) The validation mechanism - whether token based along with technical challenges. Technical challenges also
or account based. have their own importance. As the saying goes, every idea
d) Distribution architecture - whether direct issuance has to wait for its time. Perhaps the time has come to
by the RBI or through banks introduce CBDC in a larger scale. T

46 | 2021 | DECEMBER | BANKING FINANCE