While presenting UNION BUDGET 2022, Finance Minister Nirmala Sitharaman announced that Reserve Bank of India would be rolling out its digital currency soon.
RBI (Reserve Bank of India) on 1st November, 2022 launched digital Rupee (e₹) or Central Bank Digital Currency (CBDC) on pilot basis for specific cases.
What is Digital Rupee or e-rupee?
Central Bank Digital Currency (CBDC) is a digital form of currency notes issued by a central bank. CBDC in India, is referred to as e₹ (digital Rupee). It is not very different from banknotes, but it is likely to be easier, faster and cheaper as it is a digital form of currency. It can be used similarly as other forms of digital money.
Reserve Bank of India broadly defines CBDC as the legal tender issued by a central bank in a digital form. It is close to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender and a safe store of value. CBDCs would appear as liability on a central bank’s balance sheet.
Need of a Digital Currency.
Money is generally that is used for payment for goods and services and repayment of debts. Money has an intrinsic value same as a commodity. Money has evolved from Commodity (barter system) to Metallic Currency (bronze/silver/gold coins) to Paper Currency (Notes) to Digital Currency.
Currency is a form of money that is issued exclusively by the sovereign (or a central bank as its representative) and is legal tender.
Private virtual currencies defy the basic concept of money as they have no intrinsic value. The rapid growth of private cryptocurrencies in the last few years has challenged the fundamental idea of money. By utilizing the benefits of de-centralization, cryptocurrencies have emerged as an innovation that can initiate de-centralized finance and is capable of disrupting the traditional financial system.
Thus, there are various risks associated with the cryptocurrencies. They can undermine India’s financial and macroeconomic stability. The growth of cryptocurrencies has the ability to diminish monetary authorities’ power to determine and regulate monetary policy and the monetary system of the country which could pose serious challenge to the financial stability of the country. The proliferation of crypto assets can pose significant risks related to Money Laundering & Financing of Terrorism. It will also adversely affect the enforcement of foreign exchange regulations.
So, a risk-free Central Bank Digital Currency (CBDC) is the need of the hour so as to match the evolving concept of money that can provide the users the same experience of dealing in currency in digital form, without any risks associated with private cryptocurrencies.
Thus, CBDCs will provide the benefits of virtual currencies to the public while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies.
What are the features of Digital Rupee (e₹)?
The features of Digital Rupee (e₹) are:
- It is a sovereign currency issued by RBI in alignment with its monetary policy.
- It will appear as a liability on the RBI’s balance sheet.
- It must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
- It is freely convertible against commercial bank money and cash.
- It is an interchangeable legal tender for which holders don’t necessarily require a bank account.
- It is expected that e₹ will lower the cost of issuance of money and transactions.
Advantages of Digital Rupee
1.As it is a sovereign currency, it ensures settlement finality and thus reduces settlement risk in the financial system.
2.CBDCs could enable a more real-time, cost-effective integration of cross border payment systems.
3.The e₹ system has the capability of bolstering India’s digital economy, enhancing financial inclusion, and making the monetary and payment systems more efficient.
4.It can reduce the cost associated with physical cash management.
5.It will help in digitization to achieve a less cash economy.
6. An e₹ would offer the public broad access to digital money free from credit risk and liquidity risk.
7.The payments using CBDCs are final and thus reduce settlement risk in the financial system.
How Digital Rupee works?
Digital Rupee is an electronic form of money that can be used in contactless transactions. Reserve Bank of India defines CBDC/Digital Rupee as the legal tender issued by a central bank in a digital form. It is same as the sovereign currency and is exchangeable one-to-one at par (1:1) with the fiat currency.
Money in digital form is predominant in India, for example, the money in bank accounts of commercial banks. The difference between digital Rupee / CBDC and existing digital money available to the public is that CBDC would be a liability of the Reserve Bank, and not of a commercial bank.
In India, we have two types of CBDC:
- Retail (CBDC-R): CBDC-R is for all private sector, non-financial consumers and businesses. It is an electronic version of cash, basically meant for retail consumption. It will provide a safe, central bank instrument with direct access to the Central bank money for payment and settlement.
- Wholesale (CBDC-W): CBDC-W is designed for restricted access by financial institutions. It can be used for improving the efficiency of interbank payments or securities settlement.
CBDC can provide an alternative medium of making digital payments in case of operational and/or technical problems leading to disruption in other payment system infrastructures.
CBDC can reduce the liquidity and credit risk in payment systems.
To read in detail the concept of digital currency click on the link below https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1218#CP51
Launch of Digital Rupee in India
The first pilot in the Digital Rupee – Wholesale segment (e₹-W) commenced from 1st November 2022. The use for this pilot is settlement of secondary market transactions in government securities. Use of e₹-W is expected to make the inter-bank market more efficient.
India is one of the first major economies to launch a wholesale CBDC pilot.
Which banks are selected for the e₹-W pilot transactions?
There are nine banks which have been selected for the e₹-W pilot. These are:
State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.
According to RBI, the first pilot in Digital Rupee – Retail segment (e₹-R) is planned to be launched within a month in selected locations in closed user groups comprising customers and merchants.
Difference between cryptocurrency and Digital Currency
A cryptocurrency is a decentralized digital asset and a medium of exchange based on blockchain technology. Decentralized means operation without any intermediary like banks, financial institutions, or central authorities.
Whereas Central Bank Digital Currency is issued by Reserve Bank of India and is a legal tender in digital form.
To read more https://govtschemesin.com/index.php/2022/10/23/voluntary-subsidy-scheme/
https://govtschemesin.com/index.php/2022/10/24/ncap/
https://govtschemesin.com/index.php/2022/10/28/samriddhi-2022-23/