In a significant move towards embracing digital currency, Indian banks are gearing up to launch a wholesale Central Bank Digital Currency (CBDC) by January next year. This initiative aims to cautiously test the infrastructure required for digital currency transactions, specifically targeting small and medium enterprises (SMEs) in its initial phase.
A senior bank official explained to Financial Express that while the infrastructure for both wholesale and retail CBDC is largely similar, extra caution is warranted for wholesale CBDC due to the large transaction volumes involved. This necessitates robust systems for accounting, auditing, settlement reporting, and other security measures.
The Reserve Bank of India (RBI) initiated a pilot for wholesale CBDC in November last year, focusing on settling secondary market transactions in government securities. This cautious approach is echoed by the central bank, which advises against rushing the launch of wholesale CBDC.
Key players in this venture include prominent Indian banks like SBI, Bank of Baroda, Union Bank of India, ICICI Bank, HDFC Bank, Kotak Mahindra Bank, and Yes Bank. These institutions are concentrating on SMEs initially due to their relatively smaller transaction sizes and volumes, offering a suitable environment for testing the system’s reliability.
The plan is to eventually onboard larger corporates, whose transactions are significantly bigger in size. However, one of the main challenges banks face is convincing these corporates to transition from the well-established Real Time Gross Settlement (RTGS) system to CBDC, especially given the RTGS’s proven track record in dispute resolution.
To address these concerns, banks must raise awareness about the CBDC’s dispute settlement mechanisms and assuage any apprehensions companies might have. The deployment of the CBDC infrastructure, a collaboration between banks and their partners, typically takes around three months.
This initiative marks a pivotal step in India’s journey towards a more digitally integrated financial system, highlighting the importance of adapting to emerging technologies while ensuring a secure and reliable infrastructure for large-scale financial transactions.