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In the past few years, the Indian economy has gone through historic metamorphosis thanks to United Payments Interface (UPI) and demonetisation. The latest to take it ahead is digital rupee. In its voyage towards a cash-free economy, the RBI introduced Central Bank Digital Currency or the retail digital rupee on a pilot basis from December 1, 2022. A month prior to that it launched the pilot project for the wholesale segment to settle secondary market transactions in government securities. The central bank defines CBDC as a legal tender in a digital form issued by it. It is the same as a sovereign currency and is exchangeable at 1:1 par with fiat currency.
There are two types of digital rupee: token-based and account-based. While the token-based digital rupee is mainly for retail use and will be a bearer instrument like a banknote, the account based will be for wholesale and merchant purposes and will require maintenance of balance and transaction records. To get token-based rupee, individuals will need to verify their identity, while in account-based, banks will verify the account holder’s identity. In common man’s words, retail CBDC is targeted towards a person to person (P2P) and person to merchant (P2M) segment, while wholesale CBDC is targeted towards a more efficient interbank market (merchant to merchant).
The retail digital rupee, targeted towards all private sectors, non-financial consumers and businesses, has four participating banks, namely State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank. While digital rupee targeted at wholesale has nine participating banks; 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.
So how can one use the digital rupee? In order to use the digital rupee, customers need to download the digital rupee application of the respective banks only. The application will let you open a digital rupee wallet only through the wallets linked to participating banks If you have an IDFC First bank account, you will be able to make payments to wallets that are linked to IDFC or non-IDFC First bank accounts. Currently, the RBI has not set any upper limit on transactions done through digital rupee, but experts predict it will be set at INR 50,000. The bank, once it issues you the digital rupee, will not be able to keep a tab of your transaction and will not use that money. This will prevent customers from getting interest on their money as they do traditionally.
WHY DIGITAL CURRENCY
A question which must have cropped up in anyone’s mind: why introduce the digital rupee? One of the key motivators of exploring this spectrum was to save the operational costs of printing cash. The total expenditure incurred on security printing in FY21 was INR₹4,984.80 crore as compared to INR 4,012.10 crore in FY20. Contrary to popular belief, demonetisation did not lead to reduction of currency in circulation (CIC) and digital mediums have not resulted in drastic cut in CIC, with the exception of Diwali season 2022. CIC during FY16 had a total volume of 197,354 million while FY21 reported a total volume of 2,551,624 lakh. However, the RBI has time and again stated that the CBDC is not aimed at replacing cash, but merely to complement it. CBDC affects the overall value of the money issuing process and will reduce the operational cost. However, the offset of it will require fixed infrastructure costs but the following marginal cost will be lower. The digital rupee and fiat currency are not in a race to outrun the other, rather the RBI wants to build a system where a customer has the option of using the rupee in its physical or digital form. To facilitate cross-border payments and provide anonymity are also key motives behind CBDC.
“There is a high cost involved in printing and maintaining currency along with preventing counterfeiting of the same. If we move to the digital rupee, it can be saved,” shared Sunil Kumar Sinha, Senior Director, India Ratings & Research.
DIGITAL CURRENCY V/S UPI
There has been a lot of commotion as to how the e-rupee is different from UPI? UPI is simply an interface for making transactions, whereas the digital rupee is a form of currency similar to fiat currency, a government-issued currency not connected to commodities. The volume of UPI transactions has swelled dramatically from merely 0.29 million in November 2016 to 7,309.45 million in November 2022, making the payment method a part of one’s daily life. The differences between the two can be categorised under bank intermediation and anonymity. When a transaction is made through UPI, the respective banks are notified about it and a transaction log is maintained. Whereas, when a user makes a payment through their digital wallets, the banks are not notified about it and cannot keep track of their transactions. The digital rupee, hence, will provide anonymity for its users.
DIGITAL CURRENCY V/S CRYPTO CURRENCY
The sensation called cryptocurrency has boomed globally, including India. A lot has been said on the matter of an Indian-origin cryptocurrency and why it has not yet taken form. The RBI has made its stance clear; it is not welcoming towards cryptocurrencies. The central bank points out the major risks around crypto and why it can impact the financial stability of the country. Crypto currencies thrive on its guarantee of decentralisation and Decentralised Autonomous Organization (DAO). In a gist, users dealing in crypto currency can make transactions in a matter of minutes as compared to bank transactions; you do not need to register with a financial institution to make transactions in crypto, making your process private and all transactions take place in public blockchain ledger, reducing fraudulent deals. The RBI finds that due to lack of regulatory authority and intrinsic value in space, the decentralised nature of crypto is dangerous and has a potential to disrupt the monetary and fiscal health of the country. By introducing CBDC, the RBI aims at providing Indian citizens a chance to play with virtual currency without disrupting the economy. And since the RBI is an authority, CBDCs would act as direct liability on its balance sheet. Additionally, it will be using a private blockchain to facilitate CBDC, unlike the public-one cryptocurrencies use.
INDIA ISN’T THE ONLY ONE
In 2020, the Bahamas became the first country to start its own CBDC called Sand Dollar, while China became the first large economy to introduce a digital currency by the name e-CNY. So far, 11 countries have launched their digital currencies and 89 countries are mulling the idea of a digital currency.
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