Context

The Reserve Bank of India (RBI) is going to commence the pilot launch of the wholesale digital Rupee Wholesale segment (CBDC) on November 1, 2022, and has also issued a concept note.

Details:

• The first pilot in the Digital Rupee, Wholesale segment (e?-W) will commence on November 1, 2022.
• The use case for this pilot is the settlement of secondary market transactions in government securities.
• Nine prominent banks have been identified for participation in the pilot.
• Other wholesale transactions and cross-border payments will be the focus of future pilots.
• The first pilot in the Digital Rupee-Retail segment (e?-R) is also planned alongside for rollout in select locations in a closed user group.

Highlights of the Concept Note issued on CBDC:

• The purpose behind the issue of this Concept Note is to create awareness about CBDCs in general and the planned features of the Digital Rupee (e?).
• It explains the objectives, choices, benefits, and risks of issuing a CBDC in India. The Note also seeks to explain Reserve Bank’s approach toward the introduction of the CBDC.
• It discusses key considerations such as technology and design choices, possible uses of the Digital Rupee, issuance mechanisms, etc.
• It examines the implications of the introduction of CBDC on the banking system, monetary policy, and financial stability, and analyses privacy issues.

About Central Bank Digital Currency (CBDC):

• A CBDC is no different from the cash that we hold in our wallets, except that it exists in a digital form.
• The CBDC will be held in a digital wallet that is supervised by the Central bank.
• In India, it will be the RBI that supervises the digital rupee although it may delegate some power to banks.
• RBI’s digital rupee will not directly replace demand deposits held in banks.
• Physical cash will continue to be used by banks, and people who wish to withdraw cash from banks can still do so.

Types of CBDC:

• CBDC can be classified into two broad types viz. general purpose or retail (CBDC-R) and wholesale (CBDC-W).
• Retail CBDC would be potentially available for use by all viz. private sector, non-financial consumers, and businesses. Retail CBDC is an electronic version of cash primarily meant for retail transactions.
• Wholesale CBDC is designed for restricted access to select financial institutions. Wholesale CBDC is intended for the settlement of interbank transfers and related wholesale transactions.

Advantages:

• The use of e?-W is expected to make the interbank market more efficient.
• Settlement in central bank money would reduce transaction costs by pre-emptying the need for settlement guarantee infrastructure or for collateral to mitigate settlement