India CBDC Insider Reveals Current Stance of Country's Central Bank

India’s central bank is taking a very cautious approach in developing its digital rupee, a senior official familiar with India’s central bank digital currency (CBDC) pilot programs told CoinDesk, though it's making some progress.

The Reserve Bank of India (RBI) is now looking into technology solutions to solve privacy concerns posed by a digital rupee, the official said. While the bank is maintaining a careful stance on crypto, the person said, it wasn't part of its mandate to have a point of view on reducing a controversial tax that has stifled the crypto industry. The RBI isn’t mandated with legislating taxes, so that decision falls out of its purview. However, the central bank has stepped beyond its role before to try to ban crypto, so its apparent willingness to stand back on this topic may be noteworthy.

The RBI has been pushing the adoption of wholesale and retail CBDC since late 2022 when it launched its pilot programs. India's central bank has publicly said it isn’t in a hurry to implement a full-scale, retail CBDC and has not shared any timeline. But recent events suggest a quiet urgency.

Last month, its retail CBDC hit a milestone of a million transactions in one day, but only with a little help from its friends, the banks. At least one bank revealed internally it had been encouraged to deposit employee funds and benefits in CBDC rather than fiat currency to help the RBI hit that milestone.

The official declined to reveal whether the milestone has become a daily occurrence or whether banks would continue to deposit employee funds in CBDC. The banks reportedly involved in this exercise – HDFC Bank, Kotak Mahindra Bank, Axis Bank, Canara Bank, IDFC First Bank and Union Bank of India – did not respond to CoinDesk’s requests for comment.

“The evolution of a CBDC requires experimentation and considerable efforts to make it a secure product for the nation, and that can take time,” the official remarked. “The settlement aspect is easy, but latency could be better.”

The Indian central bank has added another narrative to the question of privacy in CBDC usage, which has been a point of concern for institutions and lawmakers around the world, including former U.S. president and currently the leading Republican Presidential candidate, Donald Trump.

Earlier, CoinDesk reported that the RBI would ask India's finance ministry to provide legal backing “in the form of legislation that will allow customers to delete transactions to maintain anonymity if they so choose to.”

However, the central bank is also looking for answers to the privacy question through technology.

“A privacy legislation is not the only way,” said the senior official. “Other ways to tackle this problem – particularly technology – do exist, and our team is exploring that, too.”

The RBI – one of the staunchest opponents of crypto in India and globally – does not have crypto taxation in its mandate, the senior official said.

By extension, that could mean the RBI may not register an objection if the Indian government chooses to reduce its stiff taxes on crypto.

“Not only are taxes not in our mandate or domain, it is also not our concern,” the official said. "This is about legislation, and that is for the government to decide.”

The RBI has a history of wanting crypto to be banned. It had effectively prohibited crypto between 2018 and 2020 until a Supreme Court order overturned that effort. Since then, the central bank has expressed its concerns about crypto publicly and in several forums such as the Group of 20, where India led coordination for global regulation in the space.

If it maintains neutrality on the industry's biggest ask – the reduction of taxes – that could surprise many. A reduction of taxes could boost crypto trading volumes, which is something the RBI has argued could risk India's monetary stability.

A few days after CoinDesk’s interview with the senior official, India’s finance ministry chose not to reduce the nation's stiff taxes on crypto. Such announcements are usually made as part of the budget, and no change was expected because it was an interim spending plan ahead of national elections within two months. A full budget is expected in July 2024, and that's where the crypto sector may pin its hopes.

The industry has been pushing for a reduction in the taxes – particularly the 1% tax deducted at source (TDS) on every transaction, if not the 30% tax on profits. The argument against the 1% tax may have greater weight after a study from a think tank revealed data that didn’t justify the tax and instead sought a 0.01% tax.

The RBI’s opposition to cryptocurrencies has remained constant. Even the recent approval of spot bitcoin exchange-traded funds (ETFs) by the U.S., didn’t change its stance; RBI Governor Shaktikanta Das said India doesn't need to emulate anyone, as the emerging economies cannot afford the risk from crypto.

The RBI’s CBDC pilots could see the involvement of startups in the future, the official revealed.

As technology takes center stage in the evolution of CBDCs, startup founders in the crypto and tech space have contended that pilots could benefit from their involvement.

“India’s startups have the potential to help with the nation’s CBDC pilots,” said Aritra Sarkhel, head of corporate development at ANQ, a digital banking platform in India. “Not only could startups build on India’s CBDC but also contribute to the technology challenges that may arise as the pilot evolves.”

Other nations such as Australia have seen private organizations take part in the exploration of CBDCs, but India has so far made this an in-house affair led by the fintech department of its central bank.

Read More: India Won't See Crypto or Web3 Bill for Another 18 Months, Senior Lawmaker Tells CoinDesk

UPDATE (Feb 2, 2024, 5:45 UTC): Makes clear that crypto taxes aren't in the RBI's mandate.