The Reserve Bank of India (RBI) has announced the first pilot for the retail digital Rupee, also known as e₹-R or Central Bank Digital Currency (CBDC), on 1st November 2022. Before this, a digital rupee was launched for wholesale segment to settle secondary market transactions in government securities.
About the Pilot Project
The pilot project of RBI commences from select locations and banks in a closed user group (CUG), comprising participating customers and merchants. The selected cities are Mumbai, New Delhi, Bengaluru, and Bhubaneswar where these digital currencies can be experimented with. The main goal of this pilot project is to test the robustness of the entire process of digital rupee creation, distribution, and retail usage in real time.
Understanding e-rupee
As per the definition provided by RBI, CBDC or e-rupee is the digital form of currency notes issued by the central bank and is considered an independent currency in accordance with the country’s monetary policy. Once officially distributed, CBDC will be accepted as a medium of payment and legal tender by all, including citizens, government bodies, and enterprises.
Difference between e-rupee and Cryptocurrencies
Even though both e-rupee and cryptocurrencies use a common underlying technology called distributed ledger, they are fundamentally different. Cryptocurrencies, like Bitcoin and Ethereum, are private, whereas a digital rupee will be issued and controlled by the RBI.
The Global Perspective
As of July 2022, around 105 countries were investigating the potential of CBDC. Ten countries have already launched their version of CBDC, the first being the Bahamian Sand Dollar in 2020 and the latest entrant being Jamaica’s JAM-DEX.
Types of e-Rupee
e-Rupee can be divided into two broad categories: Retail and Wholesale. Retail e-rupee is an electronic version of cash meant primarily for retail transactions by all users, while Wholesale CBDC is designed for restricted access to specific financial institutions.
The Mechanism of Retail Digital Rupee
The e₹-R operates as a digital token representing legal tender. Users can transact with e₹-R through a digital wallet provided by their banks and stored on their mobile phones or devices. Payments to merchants can be made using QR codes displayed at merchant locations.
Advantages of e-rupee
The introduction of e-rupee holds multiple advantages such as reduction in operational costs involved in managing physical cash, fostering financial inclusion, bringing resilience, efficiency and innovation in the payments system.
Challenges with CBDC in India
Despite the many advantages, CBDC also faces significant challenges in India. These include Cyber Security, as CBDC systems may risk cyber-attacks presently faced by existing payment systems; Privacy issues, as the data generated by CBDC raises concerns over anonymity and effective usage; and the potential widening of a digital divide and financial illiteracy.
The Way Forward
In order to successfully implement CBDC, technical clarity must be ensured along with addressing the demand side infrastructure and knowledge gap to increase its acceptance in rural areas. The RBI must proceed cautiously, keeping in mind the various issues and implications.
