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MUMBAI : The Reserve Bank of India will start issuing digital currency from 2022-23, a move that will provide an impetus to India’s digital economy, finance minister Nirmala Sitharaman said on Tuesday.

The government also proposed to amend the RBI Act to include central bank digital currency (CBDC) alongside traditional banknotes. It had received a proposal from RBI in October to amend the Act and enhance the scope of the definition of ‘bank note’ to include currency in digital form. “Digital currency will lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce digital rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23," Sitharaman said.

A central bank digital currency is a legal tender, same as fiat currency and can be exchanged with the fiat currency, only different in form. A 2021 survey by the Bank for International Settlements said 86% of central banks were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were running pilot projects.

While there was no clarity on the fine print of the digital currency yet, experts said the move would prompt payment companies to prepare for offering products using CBDC.

“This will trigger a wave of preparatory activity among retail payments providers and apps to offer payment mechanisms using digital rupee, along the lines of China where major digital payments players and apps are offering digital yuan payments through their apps. A similar model is likely to be seen in India to support adoption and use of a digital rupee, which is paramount for its success," said Harish Prasad, head of banking in India for FIS, a technology solutions provider for merchants and capital market firms.

According to Prasad, in the long term, the dependence on unified payments interface (UPI) for small value payments could potentially reduce. “Given the level of growth being seen on UPI and the associated stress on technology infrastructures of issuers and banks, this may be a good thing after all," he said.

Although the RBI is working on a phased implementation strategy for the CBDC, it maintains that the risk of digital frauds will be a major challenge, requiring systems that thwart malafide attempts. RBI deputy governor T. Rabi Sankar said in December that the central bank has made significant progress on the wholesale component of the CBDC, while the retail component will take time.

However, Mahesh Makhija, technology consulting leader, EY India, said it is still to be determined what problem will be solved by the CBDC. “Our consumer payment ecosystem (including UPI) is world-class, and many transactions have moved from cash to mobile payments. Our fintech ecosystem continues to innovate to meet changing consumer needs. Our interbank payment systems have national reach. It is not easy to see how a CBDC can increase financial inclusion, beyond current modes enabled with Jan Dhan, Aadhar and mobile payments."

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