The Reserve Bank of India's first pilot for retail e-rupee, its version of the central bank digital currency (CBDC), will be launched on December 1. The pilot would cover select locations in a closed user group comprising participating customers and merchants.
While the central bank had earlier commenced a pilot for CBDC in the wholesale market for secondary trade in government securities, the retail segment project is also now ready for take-off. Banks are directly tying up with last-mile fintech service providers to facilitate the initial transactions between customers and merchants.
CBDC is a digital form of currency notes
issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country's unique requirements.
India announced the launch of the Digital Rupee from the fiscal year 2022-23 onwards in the Union Budget tabled in Parliament on February 1, 2022.
According to the RBI website, CBDC is the same as currency issued by a central bank
but takes a different form than paper (or polymer). It is a sovereign currency in an electronic form and will appear as a liability (currency in circulation) on a central bank's balance sheet.
CBDCs should be exchangeable at par with cash.
How will it be issued?
It would be issued in the same denominations that paper currency and coins are currently issued and distributed through intermediaries such as banks. Users can transact with e-rupee through a digital wallet the participating banks offer and store on mobile phones or devices.
Which banks have been identified for participation?
Nine banks — State Bank of India
(SBI), Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC — have been identified for participation in the pilot project.
What are the key advantages?
According to the RBI, payments using CBDCs will be final and thus reduce settlement risk in the financial system. CBDC will eliminate the need for interbank settlement. It can be compared to a UPI system where CBDC is transacted instead of bank balances as if cash is handed over.
"Since it provides a regulated alternative to cryptocurrencies in the market, the CBDC would lead to more robust and reliable payments, lowering the dependency on cash. The underpinning technology would make transaction costs low. Being interoperable with other payment systems, it will complement existing techniques like UPI, thus completing the mobile payments ecosystem," said Jaya Vaidhyanathan, CEO at BCT Digital.
"The CBDC's interoperability with other payment systems will also contribute to enhanced adoption, co-existence, and innovation, and ultimately result in efficiency and convenience for end-users," Vaidhyanathan said.
The CBDC has some inherent benefits, being a sovereign currency. The primary advantage is that it ensures settlement finality and reduces settlement risks in the financial system.
Are there risks attached?
As per RBI, CBDC could also pose certain risks that may have a bearing on important public policy issues, such as risk to financial stability, monetary policy, financial market structure and the cost and availability of credit.
They need to be carefully evaluated against the potential benefits.