What is Digital Rupee And How It Will Work: According to a report by the Economic Times, the Reserve Bank of India (RBI) has enlisted at least five institutions, including the State Bank of India, ICICI Bank, IDFC First Bank, and HDFC Bank, to work on the retail pilot project of the central bank digital currency (CBDC).
Beginning on November 1, 2022, the central bank will pilot India’s very own digital currency, the Digital Rupee, for the wholesale market. The regulator said in a notice on October 31, 2022, that “the use case for this pilot is the settlement of secondary market transactions in government securities.”
The State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, YES Bank, IDFC First Bank, and HSBC are among the nine banks that the RBI has chosen to participate in the wholesale Digital Rupee pilot project.
The central bank also said that the retail version of the Digital Rupee’s pilot project will be introduced in a month.
The regulator published a concept paper on the Central Bank Digital Currency on October 7, 2022, outlining the characteristics and goal of the Digital Rupee (CBDC). The experimental deployment of the digital rupee for specified use cases will shortly begin by RBI. The aims, options, advantages, and disadvantages of India’s Central Bank releasing Digital Currency are described in the concept note.
Table of Contents
What is Digital Rupee And How It Will Work For You?
Describe Digital Rupee.
According to the concept note, the Central Bank Digital Currency (CBDC) is the Reserve Bank of India’s official form of currency. The regulator said that the RBI’s CBDC, also known as the Digital Rupee or e-Rupee, is interchangeable one-to-one at par with the fiat currency and is the same as a sovereign currency.
◉ CBDC is a sovereign currency that central banks issue in accordance with their monetary policies.
◉ On the balance sheet of the central bank, it is shown as a liability.
◉ All individuals, businesses, and governmental organizations must recognize it as a legitimate form of payment, legal currency, and secure place to hold money.
◉ CBDC is readily convertible into cash and money from commercial banks.
◉ Holders of CBDC do not need to have a bank account since it is fungible legal money.
◉ The CBDC is anticipated to reduce the price of money issuance and transactions.
Potential CBDC Introduction Types
General purpose or retail (CBDC-R) and wholesale (CBDC) are the two categories into which the Central Bank Digital Currency may be divided (CBDC-W). Everyone, including the private sector, non-financial customers, and enterprises, may utilize retail CBDC. Wholesale CBDC is intended to only be accessed by a small number of financial institutions.
The wholesale CBDC is created for the settlement of interbank transfers and associated wholesale transactions, while the retail CBDC is an electronic equivalent of cash mainly intended for retail transactions.
“Given that retail CBDC is a direct obligation of the central bank, it is thought that it can provide users access to secure money for payments and settlement. Wholesale CBDC has the ability to improve the security and efficiency of financial transaction settlement systems. Considering the potential each of them offers, there may be justification for introducing both CBDC-W and CBDC-R “In the concept note, RBI said.
What distinguishes The Digital Rupee from Other Digital Currencies?
“A CBDC would vary from present digital money accessible to the public because a CBDC would be a liability of the Reserve Bank, and not of a commercial bank,” the Reserve Bank said in a statement explaining the distinction between the two types of currency.
Why Has RBI Implemented CBDC?
“CBDC is anticipated to give an extra payment pathway to consumers, not to replace the present payment systems,” the agency added. “CBDC is designed to complement, rather than replace, current forms of money.”
The RBI is certain that the introduction of the digital rupee would “boost India’s digital economy, expand financial inclusion, and improve the efficiency of the monetary and payment systems.”
RBI offered the following reasons
RBI offered the following reasons for India to think about issuing CBDC:
a) A decrease in the price of managing physical cash.
b) To promote digitization in order to eliminate the cash economy.
c) Promoting payments competition, effectiveness, and innovation
d) investigating the use of CBDC to enhance cross-border transactions
e) Encouraging financial integration
f) Preserving the public’s faith in the national currency in the face of the rise of crypto assets
Cryptocurrencies vs The Digital Rupee
The rise in popularity of cryptocurrencies in recent years has alarmed RBI as well. “There are enormous hazards associated with money laundering and terrorist funding that might arise from the growth of crypto assets.
Additionally, the continued usage of crypto assets poses a risk to the goals of monetary policy since it might result in the development of a parallel economy, which would likely weaken the transmission of monetary policy and the stability of the domestic currency. Additionally, it will have a negative impact on the implementation of foreign currency laws, particularly the circumvention of capital flow restrictions “It read.
“Additionally, the creation of CBDC might provide the general public with risk-free virtual money that would grant them legal advantages without the dangers of transacting in private virtual currencies.” Therefore, in addition to shielding the general public from the extreme amount of volatility that some of these virtual digital assets encounter, it may also satisfy the need for safe digital money. Protecting public confidence in the Indian rupee against the growth of crypto assets is a key reason for implementing CBDC. “The regulator added further information.