India needs to initially go in for the basic model of central bank digital currency (CBDC) and use the payment system architecture as a backbone to make a state-of-the-art CBDC, the Reserve Bank said on Tuesday.

In its basic form, a CBDC provides a safe, robust, and convenient alternative to physical cash. Depending on various design choices, it can also assume the complex form of a financial instrument.

“Given its dynamic impact on macroeconomic policy making, it is necessary to adopt basic models initially, and test comprehensively so that they have minimal impact on monetary policy and the banking system.

“India's progress in payment systems will provide a useful backbone to make a state-of-the-art CBDC available to its citizens and financial institutions,” the RBI said in its report on ‘Trend and Progress of Banking in India 2020-21'.

In comparison with existing forms of money, the CBDC can offer benefits to users in terms of liquidity, scalability, acceptance, ease of transactions with anonymity and faster settlement, it said, adding the central banks across the globe are deliberating on how to implement CBDCs.

The RBI has been examining use cases and working out a phased implementation strategy for the introduction of CBDC with little or no disruption.

Central banks across the globe are deliberating on how to implement CBDCs, moving ahead from their initial exploratory forays.

Earlier this month, the Central Board of the RBI had discussed various aspects relating to CBDC and private cryptocurrencies.

Parliament was recently informed that the government had received a proposal from the RBI in October 2021 for the amendment to the Reserve Bank of India Act 1934 to enhance the scope of the definition of ‘bank note' to include currency in digital form.
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