RBI to start deposit tokenization pilot tomorrow: What is it?
What's the story
The Reserve Bank of India (RBI) is all set to launch a pilot project for deposit tokenization tomorrow. This was announced by Suvendu Pati, the central bank's chief general manager. Deposit tokenization refers to the process of converting real-world financial assets into digital tokens on a secure ledger, usually using blockchain or distributed ledger technology. The bank will use the wholesale leg of its Central Bank Digital Currency (CBDC) as the underlying layer for this exercise, Reuters has reported.
Explanation
What is deposit tokenization?
In this context, bank deposits are represented as tokens that can be used, transferred, or settled across systems. The aim is to ensure these tokens accurately represent underlying bank deposits while maintaining parity and redeemability.
Initiatives
RBI has been exploring the idea
The RBI has been exploring the idea of tokenizing assets such as government securities and customer deposits. This is part of its broader digital currency initiatives. The pilot project will be built on India's wholesale CBDC (e₹-W), which is primarily meant for interbank or institutional settlement, like settlements in government securities markets.
Strategic advantage
Why use wholesale CBDC for deposit tokenization?
Using the wholesale leg of India's CBDC as the underlying layer for tokenized deposits ensures they are anchored to a central counterparty, in this case, RBI. This approach leverages the integrity and finality of central bank money, while offering a controlled environment for experimentation before considering broader retail participation. It also provides a secure foundation for future developments in deposit tokenization.
Pilot progress
Wholesale and retail CBDC pilots
India launched a wholesale CBDC pilot on November 1, 2022, to facilitate government securities market transaction settlements. A retail CBDC pilot (e₹-R) was launched on December 1, 2022, for person-to-merchant (P2M) and person-to-person (P2P) transactions in select cities. By March 2024, retail CBDC usage had grown significantly with outstanding retail CBDC rising from ₹6 crore to ₹234 crore in a year.