The Reserve Bank of India (RBI) started a pilot program of its digital currency for individual users on Thursday.   

Four domestic banks — the State Bank of India, ICICI Bank, Yes Bank and IDFC — will participate in the pilot in the cities of Mumbai, New Delhi, Bengaluru and Bhubaneswar, the central bank said, adding that more banks and cities would be included later.

The trial will stress test the process of creating and distributing a central bank digital currency, or CBDC, and its use in retail in real time, according to the RBI.

It said that the e-rupee would be of the same value size as individual banknotes and coins and would be distributed by banks.

Users will be able to complete transactions using a digital wallet stored on their cellphone or other device. Payments will be made with the help of a QR code.

"It is a bold move by the RBI and will help in reducing the transaction costs of financial transactions," Lekha Chakraborty, a professor at the National Institute of Public Finance and Policy, told DW.

"This brings transparency to the financial system and helps entrepreneurs to catalyze cross-border transactions," she added.

No timeline for full-scale rollout

India's central bank hopes a digital rupee will facilitate cheaper and easier financial transactions, boost the nation's digital economy, lower the economy's reliance on physical cash as well as protect people from the volatility of private cryptocurrencies.

Last month, it allowed select banks to use the virtual currency for settling secondary-market transactions in government securities.

The RBI, however, has so far refrained from setting out a timeline for a full-scale introduction of the sovereign virtual currency.

"I don't want to give a target date by which time the CBDC will be launched in a full-scale manner because this is something where we have to proceed very carefully. This is the first time the world is doing it. We don't want to be in a great hurry," local media quoted RBI governor Shaktikanta Das as saying in November.

Threat to financial stability?

India's launch of the project comes at a time when many central banks around the world, including in China and the euro area, are considering issuing a digital version of their money. Singapore's monetary authority recently started trials of a digital version of the city-state's currency.

Governments worldwide have also been seeking ways to prevent private cryptocurrencies from posing a threat to global financial stability.

Concerns surrounding unregulated cryptocurrencies have been heightened by the recent stunningimplosion of the FTX crypto exchange, which was valued at $32 billion (€30.49 billion) before it declared bankruptcy last month following an apparent liquidity crisis.

"The CBDC by the RBI is a welcome move. In the last few months, we have seen a collapse in the world of cryptocurrencies and the unregulated crypto markets is problematic," said Shrijay Sheth, a digital commerce specialist and the co-founder of LegalWiz.in.

Chakraborty shares a similar view. "The fundamental difference between crypto and CBDC is that crypto is based on decentralized finance where RBI has no control, though both CBDC and crypto are based on blockchain technology," she said. 

A major crypto market in Asia

The Indian government, for its part, has warned that unregulated crypto markets could become avenues for money laundering, fraud and terror financing.

In 2018, the RBI banned banks and other financial entities regulated by the central bank from holding or facilitating cryptocurrency transactions, but the ban was later lifted by the Supreme Court.

The central bank continues to warn that cryptocurrencies could pose "serious concerns on macroeconomic and financial stability," while Prime Minister Narendra Modi last year said they could "spoil our youth."

But despite warnings from the authorities, India has become one of the biggest markets in Asia for cryptocurrencies and one of the fastest growing in the world. The country has 15 homegrown cryptocurrency exchange platforms.

Between 15 and 20 million people in India are estimated to own cryptocurrencies, with holdings totaling approximately $6 billion, industry figures indicate.

Edited by: Srinivas Mazumdaru