The Reserve Bank of India (RBI) has joined an increasing list of central banks worldwide who are dabbling with an idea of central bank digital currency (CBDC). According to RBI’s annual report that was released on Wednesday, an inter-departmental group was assembled, “to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency.”

Somewhat surprisingly, the need for a fiat-backed CBDC derives from large costs of printing paper notes and metallic coins. Economic Times reports that the total cost of printing paper money for the financial year 2018 was around $89 million.

The study notes that “Globally the rising costs of managing fiat paper/metallic money, have led central banks around the world to explore the option of introducing fiat digital currencies.“ RBI also mentions “rapid changes in the landscape of the payments industry“ as another major factor behind bank‘s decision to consider launching CBDC in India.

RBI seems to be open to the idea of using distributed ledger technology for payment, clearing and settlement processes, which is a welcome development, according to Mahesh Makhija, partner at EY India. According to him, “The idea of a central bank issued digital currency is very promising though issues around digital counterfeiting will need to be addressed.”

Such developments seem odd, especially having in mind RBI’s rigorous policy on virtual currencies. Back in April, the central bank announced that they would no longer be providing services to individuals or businesses that deal with cryptocurrencies. In addition, crypto businesses cannot get a loan from any bank in the country.

While this is not a total ban as is the case in China, such policy effectively kills local crypto businesses, as they are put in a huge disadvantage by being forced to directly compete with international exchanges, Binance or Huobi. Indian crypto aficionados wanting to exchange digital assets for rupee are forced to use cash, which is prone to fraud or other criminal activities.

In its report RBI shed some light on what it considers to be the riskiest features of digital assets. The bank claims that, “Though cryptocurrency may not currently pose systemic risks, its increasing popularity leading to price bubbles raises serious concerns for consumer and investor protection, and market integrity […] Furthermore, being stored in digital/electronic media – electronic wallets – it is prone to hacking and operational risk, a few instances of which have already been observed globally.“

Earlier this week, we have reported that RBI has created a secret internal unit to work with blockchain, digital currencies and AI. The new division was tasked with increasing “intellectual capital in the face of emerging technologies“ in India.

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