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Digital rupee pilot project launching: what is it and how will it work?

GS Paper 3

Syllabus: Indian Economy and related issues

 

Source: IE

 Direction: The article helps to understand about digital currency or CBDC, its advantages, and the working of the retail digital rupee.

 

Context: Reserve Bank of India (RBI) has announced the launch of India’s much-awaited Central Bank Digital Currency (CBDC), a sort of official cryptocurrency, for retail users from December 1.

About CBDC:

  • CBDC is the legal tender issued by a central bank in digital form. This means, it is the same as a fiat currency and is exchangeable one-to-one with the fiat currency, but different in its form.
  • The RBI has often expressed worries about private cryptocurrencies (Bitcoin, Ether) being used for money laundering, terror financing, and tax evasion.
  • The introduction of its own CBDC has been viewed as a means of bridging the benefits and risks of digital currency.

 

Advantages of the e-rupee:

  • Reduces operational costs involved in physical cash management
  • Foster financial inclusion
  • Improve transparency in money flows and could help reduce currency substitution (a country uses a foreign currency in addition to/ instead of, its own)
  • Brings resilience, efficiency (to the settlement system), and innovation (in cross-border payments space) in the payments system
  • Provide the public with the same benefits as private virtual currencies offer, but without the risks.

 

The launch of retail digital rupee:

  • A pilot project: The launch (Dec 1) is the first phase of a pilot project that will cover select locations and banks in a closed user group (CUG) comprising participating customers and merchants.
    • The pilot will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real-time.
  • About the retail digital rupee: It will be potentially available for use by all – the private sector, non-financial consumers, and businesses, and will provide safe-secure payment and settlement, as it will be the direct liability of the central bank.
  • Working: The e₹-R would be in the form of a digital token (legal tender) and will be issued in the same denominations as paper currency and coins, and will be distributed through intermediaries, i.e., banks.
    • Users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones and devices.
    • Transactions can be both person-to-person (P2P) and person to merchant (P2M).
    • Unlike cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks.
  • Other type (wholesale): Earlier (Nov 1), the RBI launched the digital rupee for the wholesale segment to settle secondary market transactions in government securities.

 

Global examples:

  • As of July 2022, there were nearly 100 digital currencies by various global central banks in R&D stages and two fully launched – the eNaira in Nigeria and the Bahamian sand dollar.
  • Countries have different motives for exploring and issuing CBDCs, but the Bahamas issued them to serve unbanked and under-banked populations.

 

Insta Links:

RBI’s Digital Currency

 

Mains Links:

Q. While the intent of central bank digital currency (CBDC) and the expected benefits are well understood, it is important to identify innovative methods and compelling use cases that will make CBDC as attractive as cash, if not more. Discuss.

 

Prelims Links:

Recently the Reserve Bank of India (RBI) indicated that it will soon commence limited pilot launches of e-rupee, or Central Bank Digital Currency (CBDC). Consider the following statements in this context:

    1. E-rupee is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
    2. It can be accepted as a medium of payment, legal tender and a safe store of value.
    3. The digital rupee would appear as an asset on a central bank’s balance sheet.

Which of the above statement/s is/are correct?

  1. a) 1, 2
  2. b) 2 only
  3. c) 2, 3
  4. d) 1, 3

 

Solution: a)

E-rupee is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.  Only its form is different. It can be accepted as a medium of payment, legal tender and a safe store of value. The digital rupee would appear as a liability on a central bank’s balance sheet.