Published: 13th Oct, 2022
Context
The Reserve Bank of India (RBI) is going to commence limited pilot launches of the e-rupee, or Central Bank Digital Currency (CBDC) or digital rupee, for specific use cases.
About
About e-rupee:
- E-rupee is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.
- It can be accepted as a medium of payment, legal tender, and a safe store of value.
- The digital rupee would appear as a liability on a central bank’s balance sheet.
Types of e-rupees:
- Based on the usage and the functions performed by the digital rupee and considering the different levels of accessibility, CBDC can be demarcated into two broad categories:
- General purpose (retail) (CBDC-R):
- It is an electronic version of cash primarily meant for retail transactions.
- It will be potentially available for use by all, that is, private sector, non-financial consumers, and businesses and can provide access to safe money for payment and settlement as it is a direct liability of the central bank.
- However, the RBI has not explained how the e-rupee can be used in merchant transactions in the retail trade.
- Wholesale (CBDC-W):
- It is designed for restricted access to select financial institutions.
- It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market, and capital market more efficiently and securely.
What’s RBI’s plan?
- The development of CBDC could provide the public with a risk-free virtual currency that will give them legitimate benefits without the risks of dealing in private virtual currencies.
- The approach to the issuance of CBDC will be governed by two basic considerations:
- To create a digital rupee that is as close as possible to a paper currency.
- To manage the process of introducing the digital rupee in a seamless manner.
- RBI is not in favour of e-rupee with interest. Because people might withdraw money from banks and convert it to digital rupee - causing banks to fail.
Advantages of e-rupee:
- Reduction in operational costs involved in physical cash management
- Fostering financial inclusion
- Bringing resilience
- Efficiency and innovation in the payments system.
- Add efficiency to the settlement system
- Boost innovation in the cross-border payments space
- Provide the public with uses that any private virtual currencies can provide, without the associated risks.
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