The Reserve Bank of India (RBI) has plans to launch its own digital currency — the e-rupee. This article will provide an overview of the e-rupee, the types of Central Bank Digital Currency (CBDC), and explore the benefits, challenges, and future of this venture in the context of India’s financial landscape.
Understanding e-rupee and CBDC
The e-rupee, also referred to as the CBDC or the digital rupee, is a sovereign and entirely independent currency issued by RBI in accordance with India’s monetary policy. Being a legal tender recognized by the government, it can be converted to any commercial bank’s money or notes.
RBI defines the CBDC as the digital form of currency notes issued by a central bank. The institution has no plans to associate interest with the e-rupee for fear it could motivate significant withdrawals from banks.
Distinguishing e-rupee from cryptocurrencies
While the technology that supports cryptocurrencies can also underpin aspects of the digital rupee system, it’s critical to note that cryptocurrencies and the e-rupee are not the same. Cryptocurrencies like bitcoin are private currencies, but RBI will issue and control the digital rupee. Globally, CBDCs are being explored by 105 countries as of July 2022, and ten countries have launched their versions.
RBI’s plan for implementing CBDC
RBI intends to categorize CBDC into two broad categories — general purpose (retail) (CBDC-R) and wholesale (CBDC-W). Retail CBDC will be used by all sectors including non-financial consumers and businesses while wholesale CBDC is intended for financial institutions.
The structure of CBDC can differ based on the functions performed, token-based CBDC is viewed as more similar to physical cash, while an account-based system would require records of balances and transactions. Both online and offline functionalities are being considered for CBDC, though offline mode could lead to the risk of ‘double-spending’.
Potential benefits of e-rupee
The adoption of e-rupee could lead to a reduction in operational costs associated with physical cash management, promote financial inclusion and bring efficiency and innovation in the payments system. Moreover, it can provide public the uses that any private virtual currencies can provide, but without the associated risks.
Challenges facing CBDC implementation in India
However, the move to a digital currency isn’t without its challenges. Cybersecurity concerns are paramount given the potential risk of cyber-attacks. Privacy issues related to data collection and use pose another significant challenge. Financial illiteracy and the digital divide especially in rural areas, may also impact the widespread adoption and success of the e-rupee.
The way forward
For the successful implementation of the CBDC, RBI must ensure technical clarity and safety of the underlying technologies. Demand side infrastructure and knowledge gaps must be addressed to increase acceptance in rural areas. Proceeding cautiously and being mindful of various related issues will be crucial in navigating the introduction of this digital currency.
