Digital Rupee: All you need to know

The pilot programme of Digital rupee would be commenced on November 1, 2022, said RBI. CBDC-W (The Central Bank Digital Currency- Wholesale) which is the wholesale segment is designed for restricted access to selected financial institutions.
Digital Rupee
Digital Rupee

The pilot programme of Digital rupee would be commenced on November 1, 2022, announced by RBI. 

CBDC-W (The Central Bank Digital Currency- Wholesale)  which is the wholesale segment is designed for restricted access to selected financial institutions.

The nine banks which will be operating under the CBDC-W umbrella are State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank,, Kotak Mahindra Bank, ICICI Bank, YES Bank, IDFC First Bank and HSBC for the inclusion in the pilot programme.

The wholesale CBDC is modelled to settle only interbank transactions related to wholesale.

RBI explained , "Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learning of this Pilot".

The RBI acknowledged that they are looking forward to seeing digital rupee 'bolster India's digital economy ' as they envision CBDC complementing the current forms of money rather than replacing them.  They are intending to "provide an additional payment avenue"  to the users.

Apart from CBDC-W the RBI has another vertical which specialises in the Retail Segment which is planned for launch within a month.

The retail CBDC is an electronic rendition of currency mainly utilised for retail transactions, 

 What is Digital Rupee ?

The Reserve Bank of India has distinguished CBDC as a 'legal tender' issued by a central bank in a digital form.

 It is similar to  the fiat currency and is exchangeable 'one-to-one' with the fiat currency. 

 This Digital Rupee, or e-Rupee, will act as a sovereign currency and will be in alignment with their central regulators.

What is Central Bank Digital Currency (CBDC)?

CBDCs are digital versions of government-backed money which utilises blockchain technology to assess and catalogue transaction data. 

The Reserve Bank of India interprets Central Bank Digital Currency (CBDC) as a digital form of legal tender administered by a central bank. 

 It is a digital asset or currency of the Indian Rupee and can be exchanged for fiat currency one for one. The only difference is its form.

 They administer on a centralised network, which is a permissioned network unlike UPI.

The difference is that CBDCs will work seamlessly where the transactions won’t have to go through a multitude of banks. 

Through CBDC the transactions can be made instantaneously on a single digital ledger.

 The unbanked don't have to worry as the CBDCs would be providing a way to transfer currency digitally, which is still not an option at present with UPI or wallet. 

Cryptocurrencies VS Digital Rupee

Cryptocurrencies you might have heard of such as Bitcoin and Dogecoin, are catalogued on a decentralised blockchain network, where the transactions happen, authenticated, and recorded in the public ledger without the presence of any third-party or central authority monitoring. 

The fundamental core distinction between a cryptocurrency and digital money is that cryptocurrencies operate decentralised networks while the CBDCs, though wield the blockchain technology, are completely centralised. 

A central bank supervises and facilitates the transactions with the assistance of third-party organisations.

 In short, cryptocurrencies are private capital, whereas CBDCs are government-backed capital. Therefore, CBDC has its benefit as a safe form of money. 

Benefits of Digital Rupee

CBDC has similar advantages to those we see with cryptocurrencies and digital forms of transactions.

Other possible features of CBDC are that the digital cash must be approved as a medium of payment, legal tender, and a safe reserve of value by all citizens, enterprises, and government agencies. 

  1. It can be easily transformed against commercial bank money and cash. 
  2. The digital Rupee will be a flexible legal tender, that means the holders or consumers can use it without having a bank account. 
  3. A digital rupee can never be ripped, burned, or physically damaged.
  4. A digital rupee can not be lost.
  5.  In comparison to paper money, the lifeline of a digital form of currency will go on forever.
  6. Another significant advantage is that the digital rupee is that it will be governed by a central authority hence reducing the volatile risk people often fear.

Is it safe? 

The RBI has been consistent in expressing concerns about private cryptocurrencies such as Bitcoin, Ether, etc. which have often being wielded for money laundering, terror financing, and tax evasion. 

The overture of its own CBDC has been able to bridge the benefits and risks of digital currency without any compromise.

Will Digital Rupee bolster India's digital economy?

As per RBI  the digital rupee system would be a successful medium to "bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient." 

RBI specified "CBDC is aimed to complement, rather than replace, current forms of money and is envisaged to provide an additional payment avenue to users, not to replace the existing payment systems," .

How is it different from the already available options?

RBI explained that the digital rupee would be a 'liability of the Reserve Bank, and not of commercial bank"

It is very much different and safe from the existing digital money available to the public.

What's next?

As per Gangesh Verma "The adoption and growth of CBDC is in the choices that the RBI makes based on the research and pilot programs. There will be significant investments in adapting or building infrastructure for CBDC, and the concept note is not keen to introduce incentives, so we can expect a few more policy dilemmas down the road. The good thing is India is not alone in this journey, nor is it lagging behind other countries- a careful, cautious and coordinated roadmap is the best way forward,"

RBI further mentioned that "Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learnings from this pilot," .

All around the world a number of nations, such as China, Ghana, Jamaica, and some European countries are exploring their CBDC options. 

Several have even launched their digital currencies. 

 Nine countries have exclusively launched their CBDCs.

Among these countries eight of the nine are located in the Caribbean. The first CBDC in the world was the Sand Dollar of the Bahamas which was launched in 2019. 

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