Table of Contents

Introduction

India’s central bank, the RBI, has released its first digital currency, the digital rupee, or e-rupee(e₹), as a pilot project on November 1, 2022. The Central Bank Digital Currency, or CBDC, is another acronym for the digital rupee because it is distributed in digital form by the Indian Central Bank.

About this pilot release of digital rupee

As of now, it’s exclusive to the digital rupee wholesale segment only. The settlement of secondary market transactions in government securities is the use case for this pilot project. The interbank market is projected to become even more productive with the introduction of e₹-W.

By avoiding the requirements for infrastructure to facilitate settlement guarantee systems or for collateral to minimize settlement risk, settlement in central bank money will decrease transaction costs. Based on the findings from this pilot, future pilots will concentrate on other wholesale transactions and cross-border payments.

Nine banks have been selected to take part in the pilot, namely 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 for the Digital Rupee – Retail segment (e₹-R) is anticipated to launch within a month in a few select locations with a limited number of closed user groups comprised of customers and merchants. The operationalization of the e₹-R pilot will be revealed in due course.

What is digital currency?

A type of currency that can only be received digitally or electronically is known as digital currency. Other names for it include cybercash, virtual money, digital money, and electronic money. Since this type of currency is only held in digitally encoded form, it can only be accessed via a computer or a mobile device. The gadget must have internet access in order to access the digital currency stored inside.

What is CBDC

A central bank issue currency notes in the form of digital currency, or “Central Bank Digital Currency” (CBDC). The majority of central banks worldwide are exploring the issuance of CBDC, although the main drivers behind it depend on the particular needs of each nation.

The digital Rupee or e₹ will provide an alternative to the current forms of money. Despite being virtually comparable to banknotes, it is undoubtedly easier, quicker, and less expensive because it is digital. Additionally, it provides every transactional benefit that other digital payment systems do.

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. It is interchangeable one-to-one at par (1:1) with the fiat currency and functions the same as a sovereign currency.

A CBDC would be different from existing digital currency that is accessible to the general public because it would be a liability of the Reserve Bank and not a commercial bank, despite the fact that money in digital form is the norm in India, for instance in bank accounts recorded as book entries on commercial bank ledgers.

Features of CBDC

It is a sovereign currency issued by central banks in accordance with their monetary policy.
On the balance sheet of the central bank, it is shown as a liability.
All people, businesses, and governmental organizations must recognize it as a form of payment, legal tender, and a reliable store of value.
It’s freely convertible into both commercial bank currency and cash.
The cost of issuing money and executing transactions is expected to fall.
Holders of fungible legal tender who are not required to have a bank account.

Advantage of CBDC

It guarantees settlement completeness because it is a sovereign currency, which minimizes settlement risk in the financial system. Furthermore, CBDCs might make it possible for cross-border payment systems to be seamlessly and more economically connected in real time. India has progressed substantially in terms of innovation in digital payments.

Retail and wholesale clients have access to the payment systems 24 hours a day, 365 days a year, and they are largely real-time. The cost of transactions is also one of the cheapest in the world, users have several options for processing the transaction, and digital payments have grown at a spectacular CAGR of 55% over the the past five years.

Conclusion

Is Digital Rupee Cryptocurrency?

Everyone will frequently think of “digital currency” as a type of cryptocurrency. Most crucial, though, is that while there are many different types of digital currency, not all of them are necessarily cryptocurrencies. The foundation of both cryptocurrency and digital currency is blockchain technology. The two fundamental types of digital currency are centralized and decentralized.

Although big cryptocurrencies like Bitcoin and Ethereum are instances of the decentralized form, physical currency is a centralized form run by the central bank. But crypto currencies are not centralized. Cryptocurrency is a type of digital currency in which records are maintained and transactions are authenticated by a decentralized system implementing cryptography as opposed to a central authority.

Since the Central Bank of India will regulate the CBDC (Central Bank Digital Currency), it is clear that this is not a cryptocurrency. However, starting on November 1, 2022, we will be able to conduct transactions in the future using digital money, also known as e-money or e₹ issued by the RBI.

The moto of Indian government is to encourage digitization in order to move away from an economy depending on the cash-based currency.