On October 8, the Reserve Bank of India (RBI) plans to launch a pilot project for deposit tokenization, with its own Central Bank Digital Currency (CBDC) serving as the underlying settlement layer.
The action demonstrates the central bank’s ongoing efforts to modernize India’s financial system by exploring the potential of blockchain technology to enhance transaction efficiency and revolutionize interbank settlements.
This experiment, as reported by local news agency The Hindu on Tuesday, builds upon previous phases of India’s CBDC program. The program includes a retail pilot for person-to-person and person-to-merchant payments, introduced in December 2022, as well as a wholesale pilot that commenced in November 2022. Both of these pilots have had impressive increases in adoption over the last 12 months.
RBI Tokenizes Bank Deposits on the Blockchain
Deposit tokenization refers to the process of representing traditional bank deposits as digital tokens on a secure distributed ledger. Each token corresponds to one unit of real-world deposit value, ensuring 1:1 redemption and full backing by the underlying funds.
Tokenized deposits are transferable or settled more seamlessly across systems, reducing the systemic friction and complexity that often characterizes conventional banking operations.
According to RBI Chief General Manager Suvendu Pati, the pilot will involve collaboration with select banks. The wholesale CBDC, initially introduced for institutional and government securities market settlement, will serve as the trusted base, anchoring token movements with the finality and integrity of central bank money.
Initiative Challenges
The central bank intends to test tokenized deposits in a controlled environment. This approach aims to evaluate the benefits of faster, cheaper, and more secure digital transactions while assessing regulatory guardrails and enforceability.
The pilot is framed as a risk-managed step in India’s larger digital currency modernization journey and a precursor to potential applications in other money market instruments, such as commercial papers.
For the practical workflow, when a customer deposits money with a participating bank, the bank issues a corresponding number of digital tokens on the blockchain network. The underlying funds remain intact with the custodian, but the token holder can freely transfer or trade the tokens, potentially unlocking new liquidity opportunities compared to standard deposit accounts.
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