How to use RBI's Digital Rupee

The Reserve Bank of India (RBI) has announced the launch of the first retail digital Rupee (e₹-R) pilot on December 1, 2022.

According to the RBI press release dated November 29, 2022, here some important points to know about digital Rupee (e₹-R) pilot:

• The pilot would cover select locations in closed user group (CUG) comprising participating customers and merchants.
• The e-Rupee would be in the form of a digital token that represents legal tender. It would be issued in the same denominations that paper currency and coins are currently issued. It would be distributed through intermediaries, i.e., banks.
• Users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones / devices.
• Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations.
• The e₹-R would offer features of physical cash like trust, safety and settlement finality.
• As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks.
• The pilot will assess the stability of the complete creation, distribution, and retail use of digital rupees in real time. Based on the lessons learned from this pilot, other aspects and uses of the e-R token and architecture will be evaluated in further pilots.

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Selected banks for digital rupee
Eight banks have been identified for phase-wise participation in this pilot. The first phase will begin with four banks, viz., State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities across the country. Four more banks, viz., Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank will join this pilot subsequently.

Selected cities
The pilot would initially cover four cities, viz., Mumbai, New Delhi, Bengaluru and Bhubaneswar and later extend to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla. The scope of pilot may be expanded gradually to include more banks, users and locations as needed.

What is 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 stated 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.

Main features of Digital Rupee
1) CBDC is a sovereign currency that central banks issue in accordance with their monetary policy.
2) On the balance sheet of the central bank, it is listed as a liability.
3) All individuals, businesses, and governmental organisations must recognise it as a legitimate form of payment, legal tender, and safe place to hold money.
4) CBDC is freely convertible into cash and money from commercial banks.
5) Holders of CBDC do not need to have a bank account because it is fungible legal money.
6) CBDC is anticipated to reduce the price of issuing currency and the cost of transactions.

Types of CBDC to be issued
There are two categories of Central Bank Digital Currency: general purpose or retail (CBDC-R) and wholesale. According to the RBI report dated October 7, 2022, “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 while wholesale CBDC is designed for restricted access to select financial institutions. While Wholesale CBDC is intended for the settlement of interbank transfers and related wholesale transactions, Retail CBDC is an electronic version of cash primarily meant for retail transactions.”

"It is believed that retail CBDC can provide access to safe money for payment and settlement as it is a direct liability of the central bank. Wholesale CBDC has the potential to transform settlement systems for financial transactions and make them more efficient and secure. Going by the potential offered by each of them, there may be merit in introducing both CBDC-W and CBDC-R," RBI said in the concept note.


Forms of CBDC
The structure of CBDC can be either "token-based" or "account-based."
Token-based CBDC
A token-based CBDC is a bearer instrument, similar to banknotes, meaning that whoever is in possession of the tokens at any one time is assumed to be their owner.
Account based CBDC
An account-based system, in contrast, would necessitate keeping track of all CBDC holders' transactions and balances as well as identifying who is the rightful owner of any monetary amounts.

As per the RBI press release, “in a token-based CBDC, the person receiving a token will verify that his ownership of the token is genuine, whereas in an account-based CBDC, an intermediary verifies the identity of an account holder. Considering the features offered by both the forms of CBDCs, a token-based CBDC is viewed as a preferred mode for CBDC-R as it would be closer to physical cash, while account-based CBDC may be considered for CBDC-W.”

How is digital currency different from cryptocurrency

Cryptocurrencies, which tout the advantages of decentralisation. Cryptocurrencies are built from the ground up to avoid the established, regulated intermediation and control mechanisms that are essential to maintaining the integrity and stability of the monetary and financial eco-system.

As per the RBI press release, “The proliferation of crypto assets can pose significant risks related to Money Laundering & Financing of Terrorism. Further, the unabated use of crypto assets can be a threat to the monetary policy objectives as it may lead to creation of a parallel economy and will likely undermine the monetary policy transmission and stability of the domestic currency. It will also adversely affect the enforcement of foreign exchange regulations, especially, the circumvention of capital flow measures.”

"Further, developing CBDC could provide the public with a risk-free virtual currency that will provide them with legitimate benefits without the risks of dealing in private virtual currencies. It may, therefore, fulfill the demand for secured digital currency besides protecting the public from the abnormal level of volatility that some of these virtual digital assets experience. Thus, safeguarding the trust of the common man in the Indian Rupee vis-à-vis proliferation of crypto assets is another important motivation for introducing CBDC," the regulator further mentioned.

RBI believes that it is the duty of the central bank to offer its citizens a risk-free central bank digital currency that would give consumers the same experience as exchanging money in digital form while avoiding any risks connected with private cryptocurrencies By avoiding the negative social and economic effects of private virtual currencies, CBDCs will ensure consumer protection while providing the public with the benefits of virtual currencies.