“Blockchain is not the best for digital currency”, Telecom News, ET Telecom

New Delhi/Mumbai: India’s central bank may consider other “centralized” technology models outside of blockchain – the digital transaction ledger – to house its digital currency proposal, officials and experts from the sector aware of the issue. Blockchain may not be the ideal technology due to its massive energy consumption, more so in a country like India with its population of 1.3 billion, the sources said.

Instead, the Reserve Bank of India could either offer ‘digital rupee’ directly to citizens or use the ‘indirect retail’ method by issuing digital currency to banks who in turn offer it to citizens , like what the China pilot, senior officials familiar with the developing situation said.

Central Bank Digital Currencies (CBDCs) are essentially the digital version of fiat currency and therefore unlike private cryptocurrencies, which still need to be approved by the government.

“Blockchain consumes a lot of energy even though there is a most efficient system. The settlement time is longer and there are authorization issues,” said an official with knowledge of the discussions, who said that “No other country builds its digital currency using blockchain. “There can be an arrangement where RBI and banks use blockchain, but then banks can use other technologies to transact with customers,” said said the manager.

RBI did not respond to ET’s email inquiries about the matter until press time.

On Tuesday, Finance Minister Nirmala Sitharaman, during the presentation of the Union budget, referred to the launch of a digital rupee by RBI in 2022-23, “using blockchain and other technologies”.

Digital railings

This leaves the field open for other technologies to consider.

India’s public digital infrastructure – including the Aadhaar Universal Identification Number as well as the Unified Payment Interface (UPI) – will act as the digital infrastructure rails on which the entire CBDC initiative will operate. , officials said. This will enable real-time eKYC (via Aadhaar) and automatic money transfer (via UPI model).

Experts believe that India is in the best position to launch a CBDC, given its rapid adoption of digital banking and electronic payment in recent years. Central banks in China, Russia, the Bahamas, and the United States are developing or studying the use of CBDC.

A survey conducted by the Bank for International Settlements (BIS) in 2021 found that 86% of central banks worldwide were actively researching the potential of CBDCs, but only 14% were rolling out pilot projects.

According to a report by audit and advisory firm PwC, retail CBDC projects appear to be more advanced in emerging economies, with financial inclusion listed as an expected outcome.

Mihir Gandhi, a partner at PwC India, said RBI was drawing up a master plan. “There were indications that they were working on this framework. From a technical point of view, they seem to have the architecture ready. They will focus on integrating technology partners. RBI is likely to pilot the CBDC in a sandbox environment and select specific use cases like they did with e-RUPI for Covid vaccinations. The full-fledged launch could take place later,” he said.

Finance Minister Nirmala Sitharaman proposed several initiatives on Tuesday – all with a key pivot of technology – whether in skills, agriculture, education, mental health, logistics or support for small and medium enterprises.

Doubtful chronology

However, doubts persist about the feasibility of launching the CBDC in 2022-23, as proposed by the Minister of Finance.

“According to various discussions within Niti Aayog, many levers have been operationalized with the 2022-23 timeline in mind,” said Samrat Kishor, Regional Representative at Enterprise Ethereum Alliance. “Initial use cases are likely to be centered around business-to-business and business-to-government payments, as it will be difficult to get citizens to use the digital wallet in a timely manner.”

According to experts, the “other technologies” mentioned by Sitharaman offer a more realistic scenario for realizing the dream of digital currency in India.

Pointing out that RBI has yet to issue a formal tender for a CBDC, industry experts said it raises doubts about how quickly the country can roll out a central digital currency. “Launching a CBDC requires the central bank to issue it directly to the public or issue it wholesale for interbank settlements along with a number of other policy considerations,” said Shilpa Mankar Ahluwalia, Partner and manager, fintech, Shardul Amarchand. Co.

Also, multiple design considerations such as “will the currency be limited to specific use cases, will RBI handle it directly or through intermediaries, will RBI handle also KYC, will it offer interest and, more importantly, will it be anonymized?” should also be examined.

“As the government takes its time to weigh all these policy decisions, we could see drivers in cross-border payments, which is an area of ​​focus for the government,” Ahluwalia said.

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