rbi digital rupee

On December 1, 2022, the Reserve Bank of India (RBI) will begin the first retail digital rupee (e?-R) pilot.

Here are some necessary details concerning the pilot program for the digital rupee (e?-R), as stated in the RBI news release dated November 29, 2022:

The closed user group (CUG) consists of participating customers and retailers and would cover several specific sites in the trial.

A digital token that stands in for legal cash would be the e-Rupee. Similar to how coins and paper money are currently issued, it would be published in the same denominations. Through intermediaries, namely banks, it would be distributed.

Users can conduct transactions with e?-R using a digital wallet provided by the participating banks and kept on mobile phones or other devices.

P2P (person-to-person) and P2M (person-to-merchant) transactions are both possible (P2M). QR codes are used to make payments to merchants at their physical locations.

Trust, safety, and finality of the settlement are three characteristics of physical money that the e?-R would give.

It can be converted into other forms of currency, such as bank deposits, but it will not accrue any interest, much like cash.

During the pilot, there was real-time testing of the digital rupees’ generation, distribution, and retail use. Other facets and applications of the e-R token and architecture will be tested in additional pilots based on the lessons acquired from this one.

Selected banks for the digital rupee

Eight banks have been chosen to participate in this pilot project in stages. Four banks—the State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank—will start the first phase in four locations throughout the nation. Four other institutions will eventually join this project, including the Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank.

Selected cities

The pilot would initially focus on four cities—Mumbai, New Delhi, Bengaluru, and Bhubaneswar—and later expand to include Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla. The pilot’s scope may gradually expand if more banks, users, or locations are required.

What is the digital rupee?

According to the concept note, the Reserve Bank of India’s official form of money is the Central Bank Digital Currency (CBDC). The regulatory body declared that the CBDC, also known as the Digital Rupee or e-Rupee, issued by the RBI, is interchangeable one-to-one at par with fiat money and is equivalent to a sovereign currency.

Characteristics of the Digital Rupee

1) According to their monetary policies, central banks can issue the sovereign currency CBDC.

2) It is shown as a liability on the central bank’s balance sheet.

3) It must be acknowledged as a reliable payment method, legal tender, and safe storage of funds by all private persons, commercial enterprises, and governmental organizations.

4) Cash and funds from commercial banks are freely convertible into CBDC.

5) Since CBDC is a fungible legal tender, owners do not require a bank account.

6) It is predicted that CBDC will lower the issuance and transaction fees cost.

Types of CBDC that will be issued

General purpose or retail (CBDC-R) and wholesale are the two subcategories of central bank digital currency. The RBI report from October 7, 2022, states that “CBDC can be categorized into two main forms, namely general purpose or retail (CBDC-R) and wholesale (CBDC-W).” While wholesale CBDC is intended for restricted access by specific financial institutions, retail CBDC may be used by all, including the private sector, non-financial customers, businesses, and consumers. While retail CBDC is an electronic version of currency primarily intended for retail transactions, wholesale CBDC is designed to settle interbank transfers and related wholesale operations.

“Since retail CBDC is the central bank’s direct liability, it is thought that it can give users access to safe money for payments and settlement.” Wholesale CBDC can change financial transaction settlement systems, improving efficiency and security. Given their respective potentials, it may be worthwhile to introduce both CBDC-W and CBDC-R, “According to RBI’s concept note.

Varieties of CBDC

A “token-based” or “account-based” structure is possible for CBDC.

Based on tokens, CBDC

Like banknotes, a token-based CBDC is a bearer instrument; therefore, whoever has the tokens at any given time is presumed to be the owner.

Account-based CDBC

In contrast, an account-based system would need to keep track of all CBDC holders’ transactions and balances and establish the legal owners of any monetary amounts.

The individual receiving a token will confirm that his ownership of the ticket is legitimate in a CBDC based on receipts. In contrast, according to the RBI press release, an intermediary confirms the identity of an account holder in a CBDC based on accounts. Token-based CBDCs are recommended for CBDC-R because they are more similar to actual cash, while account-based CBDCs could be considered for CBDC-W when comparing the qualities of both types of CBDCs.

What Distinctions Exist Between Cryptocurrency and Digital Currency?

Decentralized financial systems, such as cryptocurrencies. Since they were created, cryptocurrencies have avoided the well-established, regulated intermediation and control mechanisms crucial to preserving the integrity and stability of the economic and financial ecosystem.

The spread of cryptocurrency assets “may pose major dangers connected to money laundering and financing terrorism,” according to a news statement from the RBI. The continued usage of crypto assets may also pose a danger to the goals of monetary policy since it could result in the development of a parallel economy, which would likely weaken the transmission of monetary policy and the stability of the domestic currency. Additionally, it will harm efforts to enforce foreign currency laws, particularly those aimed at preventing the abuse of capital flow controls.

“Additionally, the creation of CBDC may offer the general public a risk-free virtual currency that will enable them to transact in lawful ways without the dangers associated with private virtual money.” Therefore, in addition to shielding the general public from the exceptional level of volatility that some of these virtual digital assets face, it might also satisfy the demand for safe digital currency. Another primary reason for implementing CBDC is to protect the ordinary person’s trust in the Indian Rupee in light of the rise of crypto assets, “the regulator added.

According to the RBI, the central bank should provide its citizens with a risk-free central bank digital currency that would provide customers with the same experience as exchanging money in digital form while avoiding any hazards associated with private cryptocurrencies. CBDCs will guarantee consumer protection while delivering the advantages of virtual currencies to the general public by avoiding the detrimental social and economic repercussions of private virtual money.

By Pooja Kalbalia

Ms. Pooja Kalbalia is presently pursuing her PhD in Media Studies from CHRIST University, Bangalore. She is an alumnus of the University of Delhi and the Indian Institute of Mass Communication (IIMC), New Delhi. She has a rich experience in Media planning, Marketing, and Advertising industry. She is awarded Ad Person of the year by IIMCAA in the year 2021.

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