Proposed Digital Rupee by RBI

• E-rupee (e'), also known as Central Bank Digital Currency (CBDC) or digital rupee, will shortly be launched as a limited pilot program by the Reserve Bank of India (RBI) for particular use cases.
• For various transactions, it has alluded to the use of two main kinds of e-rupee: retail and wholesale.

Describe e-rupee.

• Definition: The central bank's digital version of currency notes is known as the CBDC, according to RBI. The central bank (in this case, the RBI) issues it as a sovereign or fully autonomous currency in accordance with the nation's monetary policy.
• Legal Tender: After being 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 because it is government-recognized.
• The RBI opposes the e-rupee with interest. Considering that this could lead to bank failure if individuals withdraw money from banks and convert it to the digital rupee.
• In contrast to cryptocurrencies: Parts of the digital rupee system could be supported by the distributed ledger technology that underpins cryptocurrencies, 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.
• World Scenario: In July 2022, 105 nations were investigating CBDC. Ten nations have introduced CBDC, with Jamaica's JAM-DEX being the most recent. The first was the Bahamian Sand Dollar in 2020.

What is the RBI's CBDC strategy?

• CBDC can be divided into two major categories: general purpose (retail) (CBDC-R) and wholesale (CBDC-W), based on usage and the functions the digital currency performs as well as varying levels of accessibility.
• The electronic equivalent of currency known as retail CBDC is largely used for retail transactions. The private sector, non-financial customers, and companies will all use it. The RBI has not, however, specified how the e-rupee might be applied to retail trade merchant transactions.
• Wholesale CBDC is made to only be accessed by a small number of financial institutions. In terms of operational expenses, the use of collateral, and liquidity management, it has the potential to revolutionise the settlement systems for financial transactions carried out by banks in the government securities (G-Sec) segment, the interbank market, and the capital market.
• Structure: A token-based CBDC would be a bearer instrument similar to banknotes, requiring the recipient of a token to certify that he actually has the token. As it would be more similar to actual money, a token-based CBDC is considered as the preferred CBDC-R form.
• An account-based system would necessitate the upkeep of records of balances and transactions for each CBDC holder, as well as the identification of who owns the financial balances. In this situation, a middleman will confirm the account holder's identification. For CBDC-W, this system may be taken into account.
• Both online and offline modes are available: The offline capability will make it possible to deal in CBDC without the use of the internet, enabling access in areas with weak or nonexistent internet connectivity.
• The RBI believes there is a risk of "double spending" in the offline mode, nevertheless, because it will be technically able to use a CBDC unit more than once without updating the CBDC shared ledger.

The Issuance Model:

• The Central Bank will be in charge of overseeing all facets of the digital rupee system, including issuance, account maintenance, and transaction verification, under the direct approach.
• The central bank and other intermediaries (banks and other service providers, for example) would each perform their appropriate roles in an indirect approach.
• Consumer claims will be handled by the middleman on behalf of the central bank, which will issue CBDC to consumers indirectly through intermediaries.

What benefits does e-rupee offer?

• Lowering the operational expenses associated with managing physical cash, promoting financial access, and improving the payments system's robustness, efficiency, and creativity.
• Give the general public access to uses for private virtual currency without the risks.

What problems are there in India with CBDC?

• Cybersecurity: CBDC ecosystems may be subject to the same cyberattack risk as the current payment systems.
• Privacy concern: The CBDC is anticipated to produce enormous 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.
• Financial illiteracy and the digital divide: The NFHS-5 offers data segregation based on the distinction between rural and urban areas. In remote areas, only 48.7% of men and 24.6% of women have ever used the internet. Therefore, CBDC may widen the gender-based financial inclusion barrier in addition to the digital divide.

Way Forward

• To choose the underlying technologies that can be relied upon to be secure and stable, technical clarity must be guaranteed.
• In order to improve CBDC's adoption in rural areas for a broad base, RBI must solve the infrastructural and knowledge gaps on the demand side.
• The RBI must move slowly, keeping all relevant challenges, design factors, and ramifications in mind as it prepares to introduce the digital currency.

Read Also: Regulations Review Authority 2.0 by RBI