Presenting the Union Budget earlier this year, Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India will roll out digital currency using blockchain in 2022-23.
Recently, speaking at the Global Fintech Fest in September, RBI Governor Shaktikanta Das said the central bank was actively working towards phased implementation of digital currency in the wholesale and retail segment.
From Tuesday, the first pilot in the digital rupee-wholesale segment shall commence.
What is digital currency?
A Central Bank Digital Currency as the term goes is a digital token issued by a central bank and is pegged to the value of the country’s fiat currency – the Indian rupee in this case. Simply put, Digital Rupee will be an electronic form of the currency issued by the RBI.
What are the use cases of digital currency?
A digital currency could be used in retail as well as wholesale segments. Retail CBDC is something that people could use for things like contactless payments. On the other hand, wholesale CBDC would have a specific use case and could be accessed by specific entities authorised by the central bank.
The advantage for the government is that being a digital currency, it could be able to track all the transactions done through authorised channels very easily. Transactions done over the digital rupee will also be very cost-efficient.
How does a digital currency differ from a cryptocurrency?
A cryptocurrency is also based on blockchain. But, unlike a digital currency, which is issued by a country’s central bank and can be exchanged one-for-one with the country’s fiat currency in circulation, a cryptocurrency is decentralised. Essentially, crypto is not backed by any central bank or any fiat currency. Bitcoin was among the first cryptocurrencies launched for this very specific idea of being decentralised and the difficulty of tracing transactions done via cryptos. Over the last few years, dozens of other cryptocurrencies have mushroomed.
Given the decentralised nature, many governments and central banks, including RBI, have been averse to the idea of cryptocurrency. The union government has said in the past that cryptocurrency will never be a legal tender in the country.
What is the initial plan for the first pilot of the digital rupee?
The first pilot of the digital rupee, which commences today, will be in the wholesale segment and aimed at the settlement of secondary market transactions in government securities.
“Use of eRupee-W (wholesale) is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by preempting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk,” the RBI feels.
Who will be part of the first digital rupee pilot?
The RBI said nine banks – State Bank of India (SBI), Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC - have been identified for participation in the pilot.
What will be other areas where digital rupee pilots are likely?
The RBI has said that other wholesale transactions and cross-border payments will be the focus of future pilots. These will be based on the learnings from this first pilot.
What about the digital rupee for the retail segment?
The Reserve Bank plans to launch the first pilot of the digital rupee in the retail segment within a month. This pilot will be in select locations in closed user groups comprising customers and merchants. The details regarding the operationalisation of eRupee-R (retail) pilot are to be communicated in due course.
