India’s digital rupee may not necessarily be on the blockchain, according to the country’s central bank

• India’s upcoming digital rupee may not necessarily use blockchain technology for RBI’s central bank digital currency (CBDC).
• “The technology choices are open,” said RBI executive director T Rabi Shankar during Thursday’s press conference.
• The RBI treading is ‘carefully’ on its CBDC experiment and no external agencies are involved thus far in its development.

India’s Finance Minister Nirmala Sitharaman announced that the central bank will be ready to launch its blockchain-based central bank digital currency (CBDC), the digital rupee, before March 2023. However, the Reserve Bank of India’s (RBI) Executive Director, T Rabi Sankar, clarified on Thursday that the central bank is also open to other technologies.

India’s central bank is in no rush to launch its digital rupee. RBI Governor, Shaktikanta Das, shared that the institution’s cautious approach stems from the new-ness of the concept. “There are many risks,” he said, highlighting that cybersecurity and the possibility of counterfeiting are the biggest issues to address prior to launch.

The RBI did not reveal an exact timeline for the roll out but accepted that it will be in line with the March 2023 deadline shared with Sitharaman.

What are the alternatives to blockchain?

Blockchains are only one type of distributed ledger technology (DLT). In most cases, it is considered to be a permissionless platform. But for the central bank to remain in control of the digital rupee — and the notion that most banks would like to prevent their competitors from peeking at their liquidity strategies — it would need a permissioned system for its upcoming CBDC.

In Italy, for instance, the tech enterprise company R3 is running a pilot for interbank settlement on its Corda platform. Instead of having multiple nodes which validate a transaction, only the central bank has this power. However, unlike Italy, the RBI is currently only working with agencies within the ecosystem. “External agencies are not involved thus far. Depending on the requirements going forward, the projects and developments will be assessed accordingly,” said Shankar.

This may work for a wholesale digital rupee where the number of transactions are likely to be limited. However, for a retail digital rupee, which has to serve the needs of nearly 1.4 billion Indians, a single node to validate transactions would create a bottleneck and clog up the system.

Instead, it is possible that the RBI will choose a host of ‘trusted’ parties, who can act as validators for transactions — most likely banks. But, even then, technological improvements would be required to address the problem of scale.

Whatever the case may be, the digital rupee is expected to function exactly like paper money. The only difference between the two will be that while paper money is sorted in physical wallets, the digital rupee can be stored on a cell phone. Unlike cryptocurrencies, the digital rupee will come under the purview of the central bank.

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