The RBI recently published a Concept Note on Central Bank Digital Currency. The Note aims to explain the regulator’s objectives, choices, benefits and risks of issuing a CBDC in India. It broadly defines CBDC as the legal tender issued by a central bank in a digital form and refers to the Indian CBDC as “e₹, or digital Rupee”. Many of these choices render the space ripe for public-private partnership between the RBI and India’s thriving Web3
The Concept Note envisages the introduction of two types of CBDCs. Wholesale CBDC, designed for restricted access by financial institutions and retail CBDC, potentially available for use by all private sector, non-financial consumers and businesses. Retail CBDC has been conceptualised as a token-based system with universal access. The RBI will be the sole creator and issuer of tokens which will then be distributed by “authorised entities” called Token Service Providers.
These considerations offer a unique opportunity for the RBI to leverage the experience and expertise of Indian virtual digital assets service providers. For instance, Indian exchanges have essentially been functioning as Token Service Providers for a wide variety of virtual digital assets and have built sustainable businesses providing these services. Their core value proposition has been “on-ramping” users into virtual digital assets. They offer safe and secure platforms for users to easily access virtual digital assets, using fiat currency. These robust platforms eliminate hassles otherwise associated with transacting on blockchains, such as maintenance of private key and seed phrase etc. Given that the distribution of CBDCs is envisaged to be done through third parties, and the tokens are designed to be stored in wallets, existing players’ experience in this space can help with seamless implementation.
As close followers of the development of the Web3 ecosystem
across the globe, virtual digital asset service providers have also developed a keen understanding of the prevalent cybersecurity risks. They have successfully built resilient security frameworks to address cyberattacks. The CBDC ecosystem is also likely to face similar risks and be prone to such sophisticated attacks. The learnings of Indian virtual digital asset service providers will be valuable in this regard as well.
While the Concept Note categorically states that the CBDC will be built on a blockchain, it does not commit to many specifications of the underlying technology. For instance, there is a lack of clarity on whether the infrastructure selected for implementing CBDC would be based on a conventional centrally controlled database, or on a distributed ledger. Multiple successful blockchains
have been built by Indian founders and the ecosystem maintains extensive knowledge that can help the RBI choose the most optimal way forward. The Concept Note also acknowledges that the technical possibility of programmability is an interesting application of CBDC. Indian developers who are building Web3 solutions not only for India, but for the rest of the world, are also key stakeholders who should be considered and consulted in determining the nuances of the functioning of the underlying technology of India’s CBDC.
The RBI Concept Note explicitly acknowledges the need for interoperability and integration with existing payment systems. It notes and lauds India’s position as a global leader in terms of digital payments innovations. One of the considerations listed in the Concept Note is that the Indian CBDC should utilise the current payments infrastructure including digital wallets like Paytm, Gpay etc. There is however no mention of collaborating with successful Indian ventures in the Web3 space.
Our Honorable Prime Minister Shri Narendra Modi has repeatedly acknowledged the private sector as partners in the nation’s progress. Public-private partnership has been a core tenet of India’s development story. The nation is often touted as a global leader in terms of readiness for such collaborations. The model’s success has also been seen across a variety of sectors, ranging from delivery of high-priority public utilities such as the COVID-19 vaccine, to infrastructure development. The monumental CBDC project should be no different. India’s Web3 ecosystem holds a wealth of knowledge which, if leveraged, will substantially contribute towards a successful implementation of the e₹.
The RBI has repeatedly expressed its disapproval of the proliferation of virtual digital assets. Even the Concept Note pitches India’s e₹ as a counter to this. We believe this comparison between virtual digital assets and the e₹ is unjust and potentially reiterates a knowledge gap that the industry can help bridge. It will be a tragedy if the RBI’s prejudice against virtual digital assets prevents them from leveraging the Indian Web3 ecosystem’s wealth of knowledge towards a successful implementation of the e₹.The pages slugged ‘Brand Connect’ are equivalent to advertisements and are not written and produced by Forbes India journalists