Central bank working to amend Act to issue digital currencyOfficials and experts call for patience in introducing such a currency to avoid risks, as they suggest observing the practice in neighbouring countries.
The Nepal Rastra Bank has initiated an exercise to revise the Nepal Rastra Bank Act in order to enable the central bank to issue digital versions of the Nepali currency.
With the world economy moving towards digitisation, Nepal, in line with the efforts of many countries to adopt digital currency, has initiated a study and is preparing to issue the central bank digital currency in the country.
A central bank digital currency is a legal tender issued by a central bank in digital form. It is the same as fiat currency and therefore exchangeable with the same. Only its form is different from fiat currency.
Nepal Rastra Bank (NRB) Act 2002 does not give power to the central bank to issue digital currency. It authorises the central bank only to issue paper currency and coins.
“A task force formed by the central bank has drafted an amendment bill to authorise the Nepal Rastra Bank to issue and manage a digital currency,” said Revati Nepal, chief of the currency management department at the central bank. “After internal discussions, we will send the bill to the government to table it in Parliament.”
The central bank announced through the Monetary Policy 2021-22 that a feasibility study for a Central Bank Digital Currency in Nepal would be conducted in the context of ongoing worldwide studies regarding the usage and feasibility of digital currency.
A study team headed by Nepal, the chief of the currency management department, suggested that the issuance of such currency is feasible. But prior to that, the team suggests the central bank make legal provisions authorising itself to issue and manage the digital currency.
Nepal said that the team recommended measures on how to move ahead with introducing the digital currency including preparing the legal framework. “There are suggestions for technical and economic issues to be considered,” he said, without further elaboration.
According to him, after the issuance of such a digital currency, the NRB will prepare a separate digital wallet through which digital banking transactions could be carried out. “Measures will also be taken to explore interoperability with the digital payment service providers,” he added.
However, the central bank is not in a rush to introduce the digital currency as it wants to first observe how the neighbouring countries in South Asia including India and China move ahead with introducing digital currency.
“We don’t want to take the unnecessary risk by rushing into introducing digital currency,” said Nepal.
In February, India’s Finance Minister Nirmala Sitharaman announced that its central bank would launch a digital version of its currency in the next financial year 2022-23 which begins on April 1. The southern neighbour is set to become one of the largest economies to introduce a digital currency.
The Press Trust of India reported on July 21 quoting Ajay Kumar Choudhary, executive director (Fintech) at Reserve Bank of India (RBI), saying that the RBI was working on a phase-by-phase implementation of a digital currency in both wholesale and retail segments. India is expected to roll out the digital currency in early 2023, according to the report.
On the other hand, Nepal’s other neighbour, China, has already started trials for its digital currency in various cities.
China has been exploring potential digital currency since 2014. It first conducted a trial launch of its central bank digital currency in 2020 in its cities including Shenzhen, Suzhou, Chengdu, and Xiong’an.
These tests were expanded to Hainan province, Shanghai, and a number of other cities in 2021.
China's central bank rolled out a digital yuan, dubbed e-CNY, for Olympians and visitors during the Winter Games in February this year.
Even though different types of digital currency including cryptocurrencies like Bitcoin have been in use for the last several years, most countries are in the early stages of developing digital currency.
A 2021 Bank for International Settlements survey of central banks found that 86 percent were actively researching the potential for digital currencies, 60 percent were experimenting with the technology and 14 percent were deploying pilot projects.
Though Nepal has a long way to go before launching such a currency, it conducted a feasibility study for potentially introducing digital currency in the future. “The concept paper prepared by the study team headed by Nepal is currently under discussion at the central bank,” Nepal said. “We will identify the way forward after the conclusion of ongoing discussions.”
Introducing digital currency, however, does not appear to be a priority for the central bank as the Monetary Policy 2022-23 did not mention it.
It, however, talked about amending the Nepal Rastra Bank Act and Bank and Financial Institution Act to establish a fully digital bank. Officials are yet to clarify its concept.
“For now necessary preparatory works are being undertaken, it is not necessary to mention digital currency in the monetary policy,” said Prakash Kumar Shrestha, chief of the economic research department at the central bank.
NRB officials and experts say that it is not necessary to hasten the introduction of the digital currency right away but it is about time studies and research on such a currency are conducted.
“The absence of digital currency has not stopped services. Digital payments through various service providers are ongoing and there is wide acceptance of digital payment formats,” said Shrestha. “Cyber security must be considered before introducing digital currencies. We have to strengthen our cyber security measures before taking a step forward in the digitalisation of currency.”
Officials and experts say that Nepal should at least observe the use of digital currency in India and the technology the southern neighbour uses. “It will be good for Nepal to introduce digital currency with appropriate technology acquired from other nations,” said Shrestha.
Nara Bahadur Thapa, former executive director of NRB, also does not see the need to rush to introduce the central bank’s digital currency. “We have to study, understand and prepare based on experiences of other countries before rolling out digital currency,” he said. “It is also important to promote retail use of the digital medium for payment before such a currency is introduced in the market.”
“Adaptation of digital payment in the retail sector will help people accept the usage of the digital currency too,” said Thapa. “The authorities so far haven’t even been able to promote digital payment methods in petrol pumps and bullion shops.”
During the first 11 months of the last fiscal year 2021-22, there has been a payment of Rs1.04 trillion through mobile banking while Rs143.85 billion was transacted through internet banking, according to the central bank. There have been payments worth Rs79.98 billion through the use of QR codes. Data show that the use of internet banking has been stable over the 11 months of last fiscal year while there has been growth in payments through mobile banking and QR codes.