The Central Bank Digital Currency (CBDC) or Digital Rupee (e₹-E-Rupee) commenced on November 1 in the wholesale segment on pilot basis.
Key points
- The Reserve Bank of India (RBI) said the Digital Rupee will be used for settlement of secondary market transactions in government securities.
- The use of the E-Rupee is expected to make the inter-bank market more efficient.
- The settlement in Digital Rupee will reduce transaction costs.
- Based on the learnings from this pilot project, other wholesale transactions and cross-border payments will be the focus of future pilots of the Digital Rupee roll out.
- RBI has identified nine banks for participation in the Digital Rupee’s wholesale pilot project which 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.
- The first pilot of the Digital Rupee in the retail segment is planned for launch within a month in select locations.
- Digital Rupee in retail segment will be commenced in closed user groups comprising customers and merchants.
- Use of e₹-W is expected to make the inter-bank market more efficient.
- The launch of the Digital Rupee is in line with the Finance Minister’s announcement of Central Bank Digital Currency (CBDC) in her Budget speech on 1st Feb 2022.
- The Finance Ministry expects that the CBDC will give a big boost to digital economy and will lead to a more efficient and cheaper currency management system.
What is a CBDC?
- A CBDC is the legal tender issued by a central bank in a digital form.
- It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.
- It is akin to sovereign paper currency but takes a different form.
- CBDCs would appear as liability on a central bank’s balance sheet.
- CBDC will be a medium of payment, a legal tender and a safe store value for all citizens, businesses, governments and others, which can get it converted in the bank money or cash.
- The digital currency will be freely convertible against commercial bank money and cash. It will be a fungible legal tender for which holders need not have a bank account.
- CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade.
- Private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value.
Direct model (Single Tier model) and Indirect model
- There are two models for issuance and management of CBDCs viz. Direct model (Single Tier model) and Indirect model (Two-Tier model). A Direct model would be the one where the central bank is responsible for managing all aspects of the CBDC system viz. issuance, account-keeping and transaction verification.
- In an Indirect model, central bank and other intermediaries (banks and any other service providers), each play their respective role.
- In this model central bank issues CBDC to consumers indirectly through intermediaries and any claim by consumers is managed by the intermediary as the central bank only handles wholesale payments to intermediaries.
‘Token-based’ or ‘account-based’
- CBDC can be structured as ‘token-based’ or ‘account-based’.
- A token-based CBDC is a bearer-instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them.
- In contrast, an account-based system would require maintenance of record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances.
- Also, 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.
