All About Central Bank Digital Currency and how Digital

Rupee works

What is CBDC or the digital rupee? 

CBDC is a legal tender issued by the RBI in digital form. It is the same as the fiat currency, and is exchangeable one-to-one with the fiat currency. Only its form is different — it is not paper (or polymer) like physical cash. It is a fungible legal tender, for which holders need not have a bank account. CBDC will appear as ‘liability’ (currency in circulation) on the RBI’s balance sheet.

The e-rupee will be in the form of a digital token representing a claim on the central bank, and will effectively function as the digital equivalent of a banknote that can be transferred electronically from one holder to another. A token CBDC is a “bearer-instrument” like a banknote, meaning whoever ‘holds’ the tokens at a given point in time will be presumed to own them.

How can an individual use the e-rupee?

E-rupees will be issued in the same denominations as paper currency and coins, and will be distributed through the intermediaries, that is banks. Transactions will be through a digital wallet offered by the participating banks, and stored on mobile phones and devices. 
Transactions can be both person to person (P2P) and person to merchant (P2M). For P2M transactions (such as shopping), there will be QR codes at the merchant location.
A user will be able to withdraw digital tokens from banks in the same way she can currently withdraw physical cash. She will be able to keep her digital tokens in the wallet, and spend them online or in person, or transfer them via an app.

How is this different from other wallets?

Not very different in terms of how it will be used. However, UPI-based apps like Google Pay and Paytm have a daily and per-transaction spending limit. The RBI has not fixed any limit on holding digital rupees in wallets. Digital rupee transactions above Rs 2 lakh are likely to be reported for tax matters.

What are the types of e-rupee?

Based on usage and the functions performed by the digital rupee, and considering different levels of accessibility, the RBI has demarcated the digital rupee into retail and wholesale categories.
Retail e-rupee (launched on Thursday) is an electronic version of cash primarily meant for retail transactions, which can potentially be used by almost everyone, and can provide access to safe money for payment and settlements.
Wholesale CBDC is designed for restricted access to select financial institutions. It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment and inter-bank market, and make the capital market more efficient and secure in terms of operational costs, use of collateral, and liquidity management.

How is CBDC different from cryptocurrency?

Being backed by the RBI, e-rupee is not comparable to private virtual currencies like Bitcoin that have mushroomed over the last decade. Private virtual currencies sit at substantial odds with the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value; claims that they are akin to gold seem opportunistic.

Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. There is no issuer. They are not money — certainly not currency — as the word has come to be understood historically.

Cryptos are not backed by the central bank; in fact, the RBI wants the government to ban cryptocurrencies in India. The inherent design of cryptocurrencies is more geared to bypass the established and regulated intermediation and control arrangements that play the crucial role of ensuring integrity and stability of the monetary and financial ecosystem, says the RBI’s concept note on digital rupee.

What are the benefits of e-rupee? 

CBDC has the potential to provide significant benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced, the RBI says.

Digital rupee has some clear advantages over other digital payments systems: payments are final, and thus reduce settlement risk in the financial system. When CBDC is transacted instead of bank balances, the need for interbank settlement disappears. CBDC can also enable a more real-time and cost-effective globalization of payment systems.

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