All about digital ₹
Here are some key details of the digital rupee pilot program, according to an RBI release dated November 29, 2022:
- The experiment’s closed user group (CUG) of participating customers and merchants would be concentrated in a few geographic areas.
- The e-rupee would be a virtual currency in the form of a token. It would be governed by the same denominations in which coins and paper money are currently issued. It would be distributed through intermediaries, primarily banks.
- Users would be able to transact with E-R through a wallet offered by participating banks and carried on cell phones.
- It is possible to conduct both person-to-person (P2P) and person-to-merchant (P2M) transactions. Payments in stores can be made using QR codes displayed at points of sale.
- The e-R would offer characteristics of real money, such as trust, security, and finality of settlement.
- It can be converted into other forms of payment, such as bank deposits, and like cash, does not earn interest.
- The pilot will assess the stability of the production, distribution, and retail use of the digital rupee in real-time. Other e-R tokens, as well as architectural features. Applications, will be explored based on the lessons learned during this trial.
Selected banks for the digital rupee.
Total of eight banks have been selected for phased participation in this pilot initiative. In the first phase, four banks – State Bank of India, ICICI Bank, Yes Bank, and IDFC Initial Bank – will introduce the digital rupee in four different cities across the country. In addition to the four initial institutions, the Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank will also participate in this pilot project.
The pilot project will initially be implemented in the first four cities: Mumbai, New Delhi, Bengaluru, and Bhubaneswar. Later, Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla will also be included. The scope of the pilot can be gradually expanded to include more banks, users, and locations, depending on demand.
What is the digital rupee?
According to the concept paper, the digital central bank currency is the legal tender of the Reserve Bank of India (CBDC). The regulator has ruled that the RBI-issued CBDC, also known as the Digital Rupee or e-rupee, is convertible one-to-one with fiat money and is equivalent to a sovereign currency.
Digital Rupee features
The CBDC is a sovereign currency issued by central banks as part of their monetary policy.
It is recorded as a liability on the central bank’s balance sheet.
All individuals, businesses, and government entities must accept it as a legitimate means of payment, legal tender, and a safe depository for money.
CBDCs are easily convertible into bank money and cash.
Owners do not need a bank account as CBDC is a fungible legal tender.
CBDC is expected to reduce the cost of transactions and the cost of issuing money.
Types of CBDC that are issued
There are two forms of central bank digital currency: general-use or retail (CBDC-R) and wholesale. According to an October 7, 2022, RBI survey, “CBDC can be divided into two main types, namely general purpose or retail currencies (CBDC-R) and wholesale currencies.” (CBDC-W). Retail CBDC can be used by anyone, including the private sector, non-bank customers, businesses, and organizations, as opposed to wholesale CBDC. And which is intended for limited access to specific financial institutions. While wholesale CBDC is intended for interbank transfers and related wholesale activities. Retail CBDC is an electronic money form intended primarily for retail transactions.
“It is believed that since retail CBDC is a direct function of the central bank. It can provide consumers with access to secure money for payments and settlements. Wholesale CBDC can enhance the security and effectiveness of financial transaction settlement systems. Given the potential offered by both systems. It may make sense to implement both CBDC-W and CBDC-R on an individual basis.
Forms of CBDC
Token-based or account-based structures are also possible for CBDC.
Similar to banknotes, a token-based CBDC is a bearer instrument, so whoever holds the tokens at any given time is considered the owner.
In contrast, an account-based system would require monitoring the transactions and balances of all CBDC holders to determine who is the true owner of the funds.
According to the RBI press release. “In an account-based CBDC, an intermediary confirms the identity of the account holder, whereas, in a token-based CBDC. The person receiving a token verifies the legitimacy of their ownership of the token. Token-based CBDC is considered a preferred option for CBDC-R as it is closer to a real currency, while account-based CBDC can be considered for CBDC-W when comparing the characteristics of both types of CBDC.
How are digital currencies different from cryptocurrencies?
Bitcoin, emphasizes the benefits of decentralization Cryptocurrencies were created from the ground up to circumvent the established, regulated intermediation and control mechanisms that are essential to maintaining the integrity and stability of the monetary and financial environment.
According to an RBI press release, the rise of cryptocurrencies “may pose significant risks related to money laundering and terrorist financing. “The continued use of crypto-assets also jeopardizes monetary policy objectives. As it can lead to the growth of a parallel economy that would likely undermine the transmission of monetary policy and the stability of the domestic currency. In addition, it will undermine the enforcement of foreign exchange regulations, especially the circumvention of capital account restrictions.
“The development of CBDC can also provide the general public with a risk-free virtual currency that allows them to trade with legal benefits without the risks associated with using private virtual currencies. In doing so, it can both meet the need for a secure digital currency and protect the public from the high volatility to which some of these virtual digital assets are exposed. One of the main justifications for introducing CBDC is to protect public trust in the Indian rupee from the rise of crypto assets.
According to RBI, the central bank should provide its citizens with a risk-free central bank digital currency that replicates the experience of exchanging money into digital currencies while removing all risks associated with private cryptocurrencies. By avoiding the undesirable social and economic impacts of private virtual currencies. CBDCs will protect consumers while making the benefits of virtual currencies widely available.
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