The Reserve bank of India (RBI) is studying the idea of creating a Central Bank Digital Currency (CBDC) for India, but understands the risks of unreasonably strict regulations.

The Reserve bank of India (RBI) published its annual report on August 29. In the report, the RBI states that it's considering the idea of creating a Central Bank Digital Currency (CBDC) for India, and actively studying the idea.

"Rapid changes in the landscape of the payments industry, along with factors such as emergence of private digital tokens and the rising costs of managing fiat paper/metallic money, have led central banks around the world to explore the option of introducing fiat digital currencies," states the RBI annual report.

"In India, an 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."

"The idea of a central bank issued digital currency is very promising though issues around digital counterfeiting will need to be addressed," Mahesh Makhija, Partner Advisory, Financial Services, EY India, told Economic Times.

While the RBI is still wary of privately issued crypto currency they seem to be be open to the idea of leveraging distributed ledgers in payment system, clearing, and settlement processes. "This is a welcome development," Makhija said.

In fact, the RBI and the Indian government seem very wary of private cryptocurrencies, by which they mean open, public and permissionless cryptocurrencies like Bitcoin and Ethereum, and are trying to clamp down on the use of open cryptocurrencies in the country.

"In India, the government and the Reserve Bank are keeping a close watch on cryptocurrency and have issued pre-emptive cautionary warnings," states the RBI annual report.

"In early April 2018, the Reserve Bank barred its regulated entities from dealing in or providing services to any individual or business entities dealing with or settling in virtual currencies. Regulated entities which already provide such services were asked to exit the relationship within three months."

According the RBI, unlike the concerns on privately issued cryptocurrency, the adoption of Distributed Ledger Technology (DLT)  in the domain of payment, clearing and settlement solutions holds the promise of "significant economic benefits in future." Though no firm plans have been unveiled yet, it's easy to infer that the RBI will consider introducing a closed, permissioned form of DLT-based digital currency, monitored and controlled by the authorities.

However, the Indian authorities are aware that clamping down on open cryptocurrencies could have the effect of pushing them underground, instead of limiting their use:

"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 AML/CFT and taxation issues, require close watch."

Quartz emphasizes the risk of unreasonably restrictive regulations with the headline "India’s central bank is worried that its crypto crackdown may backfire."

In a recent research paper, a US Federal Reserve Banks economist warns that the citizens want private payments for perfectly valid reasons. If the government bans something that the citizens want, of course underground providers will step in. I am persuaded that the citizens won't consider CBDCs as a replacement for cryptocurrencies. On the contrary, they'll still use Bitcoin and other real cryptocurrencies for private transactions.

Picture from Wikimedia Commons.

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Crypto Insider Editor Giulio Prisco is a writer specialized in science, technology and business. He is persuaded that crypto has the potential to bring disruptive positive changes to the internet and society at large.

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