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All You Need to Know About RBI Digital Currency


Last Updated on December 26, 2022 by Kanakkupillai

 All You Need to Know About RBI Digital Currency

A digital version of currency notes issued by the central bank is known as the “digital Rupee” or Central Bank Digital Currency (CBDC), as the name suggests.

It is interchangeable one-to-one with the fiat currency and is similar to paper money (the Indian rupee).

On 1 November, the RBI launched the digital rupee as a pilot initiative for the wholesale sector.

All the advantages that cryptocurrency and digital payments have will be available through CBDC. Similar to digital cash, the digital rupee issued by the RBI cannot be physically harmed or lost. Its lifespan is therefore limitless.

Contrary to other digital currencies, there are fewer dangers associated with volatility with CBDC because it would be managed by a single body.

According to the RBI, the digital rupee will improve the effectiveness of the interbank market. Settlement in central bank currency would result in lower transaction costs, eliminating the requirement for collateral to lessen the risk of a settlement.

Origin of CBDC

Finance Minister Nirmala Sitharaman initially mentioned the idea of CBDC in the FY23 budget when she stated that the RBI would launch the digital rupee this fiscal.

The digital currency project of RBI

The RBI has started a pilot programme with its own digital money, making it the first major central bank in the world to do so.

The RBI will issue the Digital Rupee (e₹), also known as the e-Rupee or e-INR, as a form of central bank digital money (CBDC). The digital rupee would be introduced in the fiscal year 2022–2023 after being proposed in January 2017. Distributed ledger technology will be incorporated into the digital rupee.

As a sort of central bank digital currency, the RBI will issue the digital rupee (e₹), also referred to as the e-Rupee or e-INR (CBDC). After being suggested in January 2017, the digital rupee would be introduced in the fiscal years 2022–2023. In the digital rupee, distributed ledger technology will be used.

What does the Concept Note of the RBI signify with reference to the CBDC?

The“Concept Note” of the RBI addresses the goals, options, advantages, and hazards of issuing an electronic CBDC in India (digital rupee). In addition to the present types of money, the e₹ will offer another choice.

It is essentially identical to banknotes, but because it is digital, it is probably simpler, quicker, and less expensive. It also offers all the advantages for transactions that other digital payment systems do.

The Concept Note was released with the intention of raising awareness of CBDCs in general and the advantages of the digital rupee in particular. The note explains the Reserve Bank’s strategy for introducing the digital rupee.

The two main goals of the Reserve Bank’s strategy are to produce a digital rupee that is as similar to paper money as possible and to smoothly implement the introduction of the digital rupee.

The Concept Note also covers important issues including technology and design choices, potential applications for the digital rupee, issuance procedures, etc. It analyses privacy concerns and looks at how the adoption of CBDC will affect the banking system, monetary policy, and financial stability.

Soon, the Reserve Bank will offer restricted e-pilot launches for particular use cases. This letter is intended to promote a greater knowledge of the digital rupee and assist the general public in becoming ready to use it.

Recent technological advancements have made possible new private-sector financial goods and services, such as digital wallets, mobile payment apps, and new digital assets. Despite the fact that cash is still king, technological advancements are forcing central banks to consider how new CBDCs might supplement or supplant paper money (Committee on Payments and Market Infrastructures and the Markets Committee (CPMI-MC) 2018).

CBDC is a third form of base money, and central banks around the globe are exploring its feasibility, potential benefits, and the risks involved. As per the results of the 2021 Bank for International Settlements (BIS) survey on CBDCs conducted on 81 central banks, 90% of central banks are engaged in some form of CBDC work, and more than half are now developing them or running concrete experiments.

In October 2020, the Reserve Bank established an Internal working group (WG) to do research on the most suitable design and execution architecture for implementing CBDCs in India. This was done in recognition of the global developments in the field of CBDC. The following important recommendations were made by the WG in their report from February 2021:

  1. A strong legal foundation is required to support the creation of the e₹ (digital rupee)as a new form of money. It was suggested that the RBI Act be amended to include e-notes in the definition of the word “bank note” and that a new section be added to the RBI Act to cover e-note-specific characteristics and required exemptions.
  2. Depending on the situation and the needs of the nation, the design of e₹ may be chosen. It was advised that the goals of monetary and financial stability should be compatible with the design of e₹.

It was anticipated that the token-based variation would be adopted by the retail sector and would offer the greatest broad use and benefits of e₹. In light of this, the WG suggested starting some pilot projects that would be implemented gradually as a teaching tool.

The proposed models could be put into practise with minimal to no market disruption and assist in revealing the advantages of CBDC. A phased implementation approach for the wholesale account-based CBDC3 model in securities settlement (outright) was developed for Wholesale CBDC (CBDC-W).

A token-based CBDC4 with a tiered architectural model was developed for retail CBDC (CBDC-R), where the Reserve Bank would only be responsible for issuing and redeeming e₹ and would hand over the distribution and payment functions to the banks.

It was suggested that further research be done on the technology components of CBDC adoption on a national scale because traceability, privacy, and transaction costs vary for each type of CBDC, having varying cost consequences for each participant.

The WG reiterated that the initial models proposed were simple models that might be considered to begin work in this connection because it was of the opinion that finalising a model for the implementation of e₹ within a short period of time may not be desirable. The WG suggested that discussions on CBDC be extended in order to clarify and improve the prerequisites for the eventual adoption of different forms of e₹.

What is CBDC?

According to the Reserve Bank, CBDC is digitally issued legal tender from a central bank. It is interchangeable 1:1 with the fiat currency and functions just like a sovereign currency.

While money in digital form is predominant in India – for example in bank accounts recorded as book entries on commercial bank ledgers – a CBDC would differ from existing digital money available to the public because a CBDC would be a liability of the Reserve Bank and not of a commercial bank.

Qualities of CBDC

The following are some of CBDC’s characteristics:

  • CBDC is a form of 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.
  • must be recognised by all individuals, businesses, and governmental organisations as a form of payment, legal tender, and secure store of value
  • freely convertible into cash and commercial bank currency
  • legal tender that is fungible and does not require bank accounts for holders
  • Intended to reduce the cost of issuing money and conducting transactions.

Why is CBDC significant?

The following two factors are the main reasons the CBDC is significant:

It encourages monetary inclusion

India’s yearly FI-Index for March 2022 is 56.4, up from March 2021’s 53.9. It shows that even though different stakeholders have taken steps to improve financial inclusion in the nation, more concerted effort is needed on the part of policymakers to reach the desired outcome.

Limited physical infrastructure, particularly in distant locations, insufficient connection, a lack of specialised products, socio-cultural hurdles, and the lack of integration of credit with other financial services such as insurance, pension, etc. are some of the current obstacles to financial inclusion.

With the right design decisions, CBDC might be able to offer the general public a secure sovereign digital currency for a range of transaction requirements. It will increase the unbanked and underbanked population’s access to financial services.

By providing offline capability as a choice, CBDCs will be able to be transacted without the use of the internet, enabling access in areas with weak or non-existent internet connectivity. Additionally, it will leave the unbanked population with digital traces within the financial system, facilitating their simple access to loans.

For reasons of resilience, reach, and financial inclusion, a CBDC’s universal access features, such as offline functionality, the availability of universal access devices, and compatibility across numerous platforms, will prove to be a game changer.

It protects the general public’s confidence in the national currency against the growth of crypto assets

While releasing the report titled “Central bank digital currencies: foundational principles and core features,” Christine Lagarde, President of the European Central Bank (ECB) and Chair of the group of central bank governors, stated that “… central banks have a duty to safeguard people’s trust in our money. Central banks must complement their domestic efforts with close cooperation to guide the exploration of central bank digital currencies to identify reliable principles and encourage innovation”.

The growth of crypto assets can pose serious hazards for money laundering and terrorism financing. Additionally, the continued usage of crypto assets poses a risk to the goals of monetary policy since it could result in the development of a parallel economy, which would likely weaken the transmission of monetary policy and the stability of the domestic currency. It will also have a negative impact on how foreign exchange controls are enforced, particularly when it comes to how easily capital flow restrictions are evaded.

Additionally, the creation of CBDC might offer the general public a risk-free virtual currency that would grant them legal advantages without the hazards associated with transacting in private virtual currencies. In addition to shielding the general public from the abnormal level of volatility some of these virtual digital assets face, it may therefore satisfy the demand for secured digital currency. Protecting public confidence in the Indian rupee in the face of the growth of crypto assets is a key reason for the introduction of CBDC.

CBDC types

General purpose (retail) (CBDC-R) and wholesale CBDC can be distinguished based on usage and functions carried out by the CBDC and taking into account the various levels of accessibility (CBDC-W).

All firms and customers operating in the private sector who are not involved in the financial sector may use CBDC-R. Wholesale CBDCs, however, are made for regulated access by financial institutions. As observed in Project Jasper (Canada) and Ubin, CBDC-W could be utilised to increase the effectiveness of interbank payments or securities settlement (Singapore). Central banks are expected to think about releasing CBDC-R if they are interested in addressing financial inclusion.

CBDC-R is an electronic form of money primarily designed for use by consumers in stores. India already has a reliable payment system with a wide range of payment options, including real-time gross settlement (RTGS), national electronic fund transfer (NEFT), and unified payments interface (UPI), as well as a rapid rise in digital transactions. With the introduction of CBDC-R, a secure central bank instrument that has direct access to central bank funds for settlement and payment will be available.

It is also asserted that it might increase a nation’s retail payment systems’ resilience. In the event that technical or operational issues cause disruptions in other payment system infrastructures, CBDC can offer a substitute method of conducting digital payments. According to Dyson and Hodgson (2016), CBDC could lessen the concentration of liquidity and credit risk in payment systems.

Additionally, CBDC-W has the ability to improve operational expenses, the utilisation of collateral, and liquidity management by making the settlement systems for financial transactions conducted by banks in the G-Sec Segment, Inter-Bank Market, and Capital Market more secure and efficient. Additionally, this might have coincidental advantages like avoiding infrastructure for settlement guarantees or the requirement for collateral to lower settlement risk.

The upgrading of trading platforms, exchanges, and the integration of CBDC-W with RTGS are all prerequisites for implementation. Adoption will also depend on whether the CBDC-W settlement is less expensive than current settlements, including those with liquidity savings, guaranteed funding, and margin funding, among others.

The introduction of both CBDC-W and CBDC-R may make sense in light of their distinct advantages.

CBDC: Perspective on countering money laundering and terrorist financing

It is important to note that CBDCs must be designed in accordance with the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) standards by central banks (along with any other regulatory expectations or disclosure laws). Regulations and requirements for AML and CFT must be met by a CBDC payment system. This implies that at least one institution or authority within the larger CBDC network would need to be aware of the identification of CBDC users in order to verify the authenticity of their transaction.

Payment interface providers could be solely responsible for AML duties (commercial banks). Under the intermediate model, commercial banks may be in the best position to perform AML/CFT checks and it is their duty to ensure that the rules are followed.

Unless there is a new Financial Action Task Force (FATF) recommendation expressly for CBDCs, opening and maintaining CBDC accounts with commercial banks would not require any modification to the present AML/CFT requirements. With this approach, the bank would not keep specific personal information about individual users, reducing privacy concerns that might be associated with keeping user information, but the CBDC system as a whole might still fulfil AML regulations.

In summary, the CBDC framework should focus on the following two issues from the AML/CFT perspective:

  1. It must be made sure that the framework clearly defines who is ultimately responsible for customer due diligence (CDD).
  2. To safeguard the integrity of the financial system, the CBDC’s architecture needs to include a method for tracking, detecting transactions in accordance with cash threshold limit.

How can I purchase and use Indian RBI digital Rupee?

The RBI introduced the digital rupee on 1 December 2022, in four Indian cities. Residents of Mumbai, Bengaluru, New Delhi, and Bhubaneswar can now swap digital rupees using digital wallets provided by the collaborating bank.

Additionally, you can use this wallet for online transactions while using a mobile smartphone or other device. You can conduct digital rupee transactions with businesses and private individuals in accordance with central bank regulations.

To facilitate transactions, these partnering banks have released the digital rupee app. You should be aware that the e-rupee is not a cryptocurrency but rather a digital representation of your cash or paper money. So, to conduct transactions and pay with an e₹, use the quick response (QR) codes displayed at stores or malls.

Before you buy or conduct any transactions using the digital rupee  pilot, consider the following:

Participants in a closed user group (CUG) include customers and participating businesses. The CUG is covered by the e-pilot in some areas.

The denominations of the e₹ will be the same as those of paper money or coins. It is a digital representation of the current currency that will be delivered via banks as a middleman.

For online e₹ transactions, your bank will provide a digital wallet that you can use on your cell phones or laptops.

Using QR codes displayed in malls or stores, you can choose between person-to-person (P2P) and person-to-merchant (P2M) transactions.

Despite being digital, the e-R has all the characteristics of physical money, including safety, settlement finality, confidence, etc.

The digital rupee can be exchanged for other currencies, such as bank deposits, but it will not accrue interest.

The retail use of digital rupees, distribution, and the stability of entire creation will all be evaluated in real-time as part of the e₹ trial. In addition, the RBI will evaluate various applications and features of the digital token in light of this evaluation.

Learn about characteristics and advantages of the digital Rupee

Although the CBDC differs from cryptocurrencies in every way, it is comparable to cryptocurrencies in terms of advantages. Government entities and other businesses accepting digital rupees as legal cash, a form of payment, a safe deposit box, etc. is one of the CBDC’s noteworthy advantages.

Let’s examine its advantages.

Digital currency is easily convertible into cash or business bank currency.

You can use the digital rupee even if you don’t have a bank account because it is a flexible kind of legal money.

It is impervious to burning, pulling apart, and other forms of physical harm.

No other digital currency can take the place of e₹.

Paper money is equivalent to digital money. It will therefore endure for as long as your paper money does.

The digital rupee is managed by the government, unlike cryptocurrencies. As a result, it poses little volatility risk and offers user security.

Where am I able to purchase digital rupees?

The four banks to which the RBI has granted licences to provide digital rupees for purchase are the IDFC First Bank, Yes Bank, ICICI Bank, and State Bank of India. However, in the near future, the RBI will add a few more banks to this experimental programme.

What distinguishes UPI from the digital Rupee?

You can transact with your actual money via the UPI interface. Digital money, on the other hand, is an additional type of paper money that may be taken out of a bank account.

Can I use a digital Rupee for purchases?

Yes, you can make purchases from a business or mall with a QR code that accepts a digital currency using the retail digital rupee, or CBDC-R.

The digital currency can be kept in your digital wallet and used for online purchases.

Can I send family and friends digital currency?

Your actual currency has been converted into digital form. As a result, you can use them in transactions and send them to friends and family just like regular money. For the transaction, a digital wallet is required for both the sender and the recipient of the digital currency.

Recent advancements in technology-based payment methods have prompted central banks all over the world to consider the potential advantages and hazards of issuing a CBDC in order to keep up with the current innovation trend.

The introduction of CBDCs is something that the RBI has also been considering for some time. Currently, the RBI is working on a phased implementation strategy, going step by step through various stages of pilots before the final launch, and is also looking at use cases for the issuance of its own CBDC (digital rupee (e₹)), with little to no disruption to the financial system.

We are currently at the vanguard of a watershed change in the history of money that will fundamentally alter what money is and how it works.

The central bank’s digital currency, CBDC, makes a lot of promises, including the assurance of transparency, minimal operating costs, and the ability to expand the current payment systems to meet the needs of a larger range of users.

Around the world, CBDC is still in the conceptual, development, or pilot phases. In order to create a solution that satisfies the requirements in the absence of precedent, considerable stakeholder consultation and iterative technological design must be conducted.

Even if the purpose of CBDC and the anticipated benefits are clear, it’s critical to find creative solutions and compelling use cases that will make CBDC at least as appealing as cash.



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