The Reserve Bank of India (RBI) will shortly begin the pilot release of e-rupee for specified use applications after the Union Government announced the launch of the digital currency in this year’s budget.
The Reserve Bank of India recently published its concept note for central bank digital currency (CBDC). The concept note is aimed at improving understanding of CBDC and the characteristics of the digital rupee (e₹), according to the RBI.
What is e-rupee?
According to RBI, the CBDC is a central bank’s digital version of bank notes. The central bank (in this case, the RBI) issues it as a sovereign or fully autonomous currency in compliance with the nation’s monetary policy.
Once it has been formally issued, CBDC will be regarded by all three parties—citizens, governmental entities, and businesses—as a form of payment and legal tender. It is freely convertible into cash or notes from any commercial bank since it is government-recognized.
However, the e-rupee with interest is not supported by RBI. Considering that this could lead to a banking crisis if individuals withdraw money from banks and convert it to a digital rupee.
How will e-rupee work?
A token-based method will be used to transfer e-rupees to the general population. The recipient’s public key must be known by the person sending the digital money (a sort of digital address). The recipient’s private key (unique password) is used in conjunction with the public key to complete the transfer.
The RBI concept note stated that “…unique tokens based on approved methodologies would need to be created, which could be slightly resource-intensive.”
Transactions are likely to be somewhat anonymous; those involving larger sums may be required to be reported, whilst those involving lesser sums may be completely anonymous, exactly like cash transactions.
How is it different from Cryptocurrencies?
The distributed ledger technology that underpins cryptocurrencies could support some aspects of the digital rupee system, although the RBI has not yet made a decision on this. Cryptocurrencies like bitcoin and Ethereum, however, are “private” by definition. On the other side, the RBI will be the one that issues and manages the digital rupee.
In July 2022, 105 nations were investigating CBDC. The tenth country to introduce CBDC is Jamaica, with JAM-DEX being the latest. The Bahamian Sand Dollar was launched in 2020.
What are the various versions of CBDC?
While wholesale CBDC (CBDC-W) is only intended for certain financial firms, retail CBDC (CBDC-R) might potentially be used by everyone, including the private sector, non-financial customers, businesses, and organizations.
CBDC-R is an electronic copy of currency specifically intended for retail transactions, whereas CBDC-W is intended for the processing of interbank transactions and associated wholesale operations.
The RBI stated that a token-based CBDC, which is a bearer instrument like banknotes, is considered a preferred mechanism for CBDC-R as it would be closer to actual currency. Whoever owns the tokens at a given point in time would be presumed to own them.
It is possible to investigate using account-based CBDC for CBDC-W (which necessitates keeping track of all holders’ transactions and balances as well as identifying who owns the financial balances).
It would make more sense to issue non-interest-bearing CBDCs, especially in light of the fact that actual cash carries no interest.
The RBI emphasized that among other things, lowering operational costs associated with physical cash management, promoting financial inclusion, bringing resilience, efficiency, and innovation to the payment network, enhancing efficiency in the settlement system, and driving innovation in the cross-border transaction space are the main reasons for exploring the issuance of CBDC in India.
A CBDC that relies on tokens would function as a bearer instrument similar to banknotes, requiring the recipient of the token to certify that he actually owns it. Since it would be more similar to actual money, a token-based CBDC is considered the preferred CBDC-R form.
A balance-based system would need to keep track of all CBDC holders’ transactions and balances in order to identify who is the rightful owner of the money in the account. In this situation, an intermediary will confirm the account holder’s identification. For CBDC-W, this system may be taken into consideration.
Is CBDC a risk-free option?
The CBDC is anticipated to produce large amounts of data in real-time. It will be difficult to use the Data effectively and protect its privacy and address concerns about its anonymity. However, the RBI paper notes that CBDC will offer the public usage that any private virtual currency can offer, without the associated risks.
In remote locations, the use of CBDC’s offline capability would also be advantageous and provide availability and resilience advantages when mobile service or electricity is unavailable.
