RBI’s Digital Currency

[vc_section][vc_row][vc_column width=\”1/2\”][vc_column_text css=\”.vc_custom_1671086770239{border-top-width: 1px !important;border-right-width: 1px !important;border-bottom-width: 1px !important;border-left-width: 1px !important;padding-top: 20px !important;padding-right: 20px !important;padding-bottom: 20px !important;padding-left: 20px !important;background-color: #434a9b !important;border-left-color: #434a9b !important;border-left-style: solid !important;border-right-color: #434a9b !important;border-right-style: solid !important;border-top-color: #434a9b !important;border-top-style: solid !important;border-bottom-color: #434a9b !important;border-bottom-style: solid !important;}\”]1. Expert in Panel:

  • Ashok K. Nag, Former Advisor, Reserve Bank of India
  • Subhomoy Bhattacharjee, Consulting Editor, Business Standard
  • Amit Dubey, Digital Technology Expert

[/vc_column_text][vc_column_text]2. Reason for being in news

The Reserve Bank of India (RBI) recently announced the commencement of India’s first Digital Rupee pilot project for specific use cases

3. Discussion

The use cases for the pilot project also include the settlement of secondary market transactions in government securities and about 9 banks have been recognized for participation in this project.

RBI has started India’s first Digital Rupee pilot project in the wholesale segment and believes that the use of the Digital Rupee in the wholesale segment will make the interbank market more efficient and reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or collateral to mitigate settlement risk.

RBI also aims to launch the first pilot in the Digital Rupee-Retail segment soon in select locations in closed user groups consisting of customers and merchants.

3.1. Central Bank Digital Currency (CBDC) or Digital Rupee

CBDC is a digital form of currency notes issued by the central bank of India i.e. RBI. RBI defines CBDC as the legal tender issued by a central bank in a digital form.

CBDC in India will be referred to as “Digital Rupee” or “e₹” and it will act as an additional option to the currently available forms of money. CBDC is very similar to banknotes but they are in digital form and have several benefits such as being easier, faster, and cheaper.

Experts say that CBDC or Digital Rupee will have all the advantages that are offered by the cryptocurrency and at the same time it also addresses most of the concerns associated with cryptocurrencies.

3.1.1. The need for CBDCs

With the changes in the technological shape of the world, the form of currency is also rapidly changing across the world. In this context, central banks across the world have started to believe that digital currencies would be the future.

The advent of advanced technologies such as blockchain has led to the digitalisation of money and hence it has become essential for the development of Central Bank Digital Currencies to exploit the potential benefits these new-age technologies offer.

Further, the large-scale mushrooming of private cryptocurrencies in recent years has challenged the fundamental notion of money and the central banks around the world are coming up with their own form of digital currencies which are sovereign and thereby mitigate the risks associated with private cryptocurrencies.

3.1.2. Different types of CBDC

CBDC or the Digital Rupee is categorized into two types namely Retail (CBDC-R) and Wholesale (CBDC-W). Retail (CBDC-R):

It is an electronic version of cash primarily meant for retail transactions. CBDC-R will be potentially available for all users. CBDC-R provides access to safe money for payment and settlement as it is a direct liability of the central bank. Wholesale (CBDC-W):

It is intended for the settlement of interbank transfers and related wholesale transactions. CBDC-W can be used for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market. CBDC-W has the potential to transform settlement systems for financial transactions and make them more efficient and secure.

3.1.3. Technology involved

Since CBDCs are digital in nature, technological considerations have remained at the core. The key technology behind the CBDC is blockchain technology which is a distributed ledger-based technology but it is in a centralised form. The underlying principle behind the centralized form is to ensure cybersecurity, technical stability, resilience and sound technical governance standards.

3.1.4.  Significance of the pilot project launched by RBI

The launch of the Digital Rupee is seen to be a landmark moment in the history of currency as it is expected to revolutionize the way business is being undertaken and transactions are conducted. The pilot project in the wholesale segment will also play a crucial role as a confidence-building mechanism to show all the stakeholders that the Digital Rupee is working exactly the way it was anticipated before being introduced in the retail segment or in a full-fledged manner.  Further, the pilot project will help RBI iron out all aspects of CBDC before the full-fledged launch.

3.1.5. Recommendations

  • RBI must analyze and learn from various experiences; experiments were undertaken across the world and global best practices which include the e-krona of Sweden as they help in the reduction of various infrastructure costs.
  • RBI also must ensure that the Digital Rupee mimics the role played by the paper currency which can be transferred in a wallet-to-wallet form without the need for a bank account.
  • RBI must also work towards addressing the prevailing trust issues on digital currencies amongst the public which includes the fear of cybercrimes, cyber frauds and money laundering.
  • Further, with CBDCs across the world still in the conceptual, nascent, or pilot stages, there is a lack of precedence. Thus there is a need for extensive stakeholder consultation along with iterative technology design to develop a platform that meets the demands.

3.1.6. Conclusion

The Digital Rupee or the CBDC of RBI is promising various benefits which include ensuring transparency and low cost of operation. However, elaborate planning and monitoring with respect to scope, cost, and timelines hold the key to ensuring the effective introduction and implementation of CBDC.

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