The Digital Rupee — A Crucial Step in India’s Digital Transformation
What is Digital rupee?
The Reserve Bank of India (RBI) on 1st November launched India’s first digital rupee pilot project for the wholesale segment. Digital rupee (e₹), also known as Central Bank Digital Currency (CBDC), is a digital form of currency notes issued by the central bank, Reserve Bank of India. It is substantially not different from banknotes, but being digital it is likely to be easier, faster and cheaper. It also has all the transactional benefits of other forms of digital money. The central bank said that nine banks have been identified for participation in the pilot project. The RBI will follow up on the wholesale e-rupee pilot with a similar trial on the retail side also.
How digital rupee is different from crypto currency?
Both digital currency and crypto currency involve online modes of transactions, there are slight differences between the both. Central Bank Digital Currency (CBDC) refers to the digital form of a country’s fiat economy, while crypto currencies are an alternative form of payment with unique algorithm. The digital currencies can be called the country’s digital fiat and the crypto currencies are digital assets in a decentralized network. On the other hand, while the digital currencies are entirely regulated by the central bank and the government who set value of the currency, crypto currency’s value is independent of central banking authorities and follows a transparent procedure from mining to ownership to transfer of assets.
Objective of launching Digital Rupee?
India’s advancement in the battle for virtual currencies is the main goal of the Reserve Bank of India’s (RBI) pilot project on digital currency. This is also due to the rising popularity of cryptocurrencies. The introduction of Digital Rupee would surely alter the playing field because the digital rupee will increase efficiency and transparency due to the use of blockchain technology. Blockchain will also enable ledger maintenance and real-time tracking. Customers will have continuous access to the payment system, whether they are wholesale or retail. Direct payments from Indian customers reduce transaction costs and enable real-time account settlements. Additionally, employing a digital rupee will expedite international trade and remove the requirement for opening a bank account.
Impact on the economy and banks
The wholesale CBDC has the potential to transform the settlement systems for transactions and make them even more feasible for users also bolster the country’s overall digital economy for more financial inclusion. The use of the digital rupee will speed up cross-border transactions more efficient and secure , even for users linked to a particular bank account. As stated by the apex bank, the move will reduce transaction costs by preempting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. CBDC can be classified into two basic categories –retail CBDC and wholesale CBDC. Initially, the RBI rolled out digital currencies for the wholesale sector. The central bank has ideated wholesale CBDC for the settlement of interbank transfers and related transactions.RBI has selected nine banks for participation in the digital rupee’s wholesale pilot project. These are State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.
RBI has selected nine banks for participation in the digital rupee’s wholesale pilot project. These are State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.
Why digital rupee is the future of money ?
• Centralised : Central bank digital currency (CBDC) — a new digital form of money issued by central banks — may just be the new infrastructure we need for ushering in more trust, resilience, and efficiency. • Ease of use and Transparency: Every unit of CBDC can be uniquely identifiable and traceable, and is recorded on blockchain-powered distributed ledgers which allows all participants / banks to record the transactions and balances. • Global acceptance : There will be no longer geographical limits with the internationalization of current and financial account transactions • No bank account needed like that for UPI : User doesn’t even have to open a bank account in order to transact. • The Digital Rupee can offer real-time visibility and insights into the state of the economy and thereby, enable more precise execution of the monetary policy. • Likely to save operational costs of printing, distributing and storing banknotes. • Governments can access all transactions happening within the authorised networks. • Fraud : The Digital Rupee can help prevent fraud. The current system relies on post-facto checks to prevent fraud, CBDC could address this proactively with embedded programmability and regulated traceability.
