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In an age where nearly every aspect of our lives is being digitised, the monetary sphere is no exception. Imagine a world where financial transactions are as quick and easy as sending an email, a world where the security of your money is no longer a pressing concern. This is the promise of digital currency, a new form of currency that exists purely in a digital format.
At the forefront of this revolution in India is the Digital Rupee, a Central Bank Digital Currency (CBDC) currently being piloted by the Reserve Bank of India (RBI). But what does this actually mean? In essence, the Digital Rupee or e₹, will be a digital form of our legal tender, exchangeable at par with the existing currencies. The digital rupee is the RBI’s accepted version of cryptocurrencies.However, the perks of the Digital Rupee extend far beyond just the ease of digital transactions.
With the buzz around cryptocurrencies, it's essential to understand how a CBDC like the Digital Rupee is different.
Cryptocurrencies like Bitcoin or Ethereum are decentralised digital assets with no issuer, which operate in a regulatory grey area. They are not considered "money" in the traditional sense. The Digital Rupee, on the other hand, is a legal tender issued by the RBI, thus carrying governmental regulation and oversight.
This digital currency has the same functionality as regular currency, but it is not a decentralised asset like cryptocurrencies. It is a form of money that you can use to make purchases, just like you do with digital wallets, NEFT, and IMPS transactions.
The push towards CBDC is not unique to India. Several countries, driven by the increasing digitalization of financial systems, are exploring or have already implemented digital currencies.
The Bahamas, Nigeria, Dominica, Montserrat, Antigua and Barbuda, Saint Lucia, St. Kitts and Nevis, and St. Vincent and the Grenadines have already launched their digital currencies.
Russia has completed the initial trials for the Digital Ruble, while China is planning to launch the eCNY or digital Yuan by 2022.
You might be asking, "why do we need a digital alternative to cash?" The answer lies in the unique capabilities of CBDCs that traditional physical currency simply can't match.
Apart from potentially transforming the financial landscape of the country, the introduction of the Digital Rupee has several direct benefits for the common citizen. These include faster and more efficient money transfers, lower transaction costs, and a 24X7 availability of services. Furthermore, with Digital Rupee, the hassles associated with physical cash, such as carrying, storing, and dealing with damaged notes, will become a thing of the past.
The Reserve Bank of India (RBI) wants to expand the ongoing pilot of the Central Bank Digital Currency (CBDC) and incorporate various use cases and features in 2023-24. In its annual report for 2022-2023, the central bank said, During 2023-24, the Reserve Bank aims at expanding the ongoing pilots in CBDC-Retail and CBDC-Wholesale by incorporating various use cases and features. The pilot in CBDC-Retail is proposed to be expanded to more locations and to include more participating banks.
The central bank proposed to issue two versions of the Digital Rupee — CBDC-Wholesale (CBDC-W) and CBDC-Retail (CBDC-R). CBDC-Wholesale is designed for restricted access to select financial institutions while CBDC-Retail can be used by all including the private sector, non-financial consumers, and businesses.
The pilot programme of wholesale Digital Rupee segment started on November 1, 2022. The use case for this pilot is the settlement of secondary market transactions in government securities (G-secs). The use of CBDC-W is expected to make the inter-bank market more efficient, the central bank said. Nine banks including 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 have been participating in the pilot of CBDC Wholesale.
The first pilot for CBDC-Retail was announced on December 1, 2022. Also known as retail Digital Rupee, it offers features of physical cash like trust, safety, and settlement finality in digital mode.
e₹-R can be held or used to carry out transactions, similar to how currency notes can be used in physical form. The retail e-Rupee has been launched in denominations of 50 paise, 1, 2, 5, 10, 20, 50, 100, 200, 500, and 2000, while wholesale e-Rupee does not envisage any denomination, RBI said in its annual report.
The retail Digital Rupee is proposed to be distributed through the two-tier model, according to the concept note released by RBI earlier. The Reserve Bank of India will issue and redeem e₹-R while the distribution and payment services will be delegated to the banks.
The pilot of the retail e-Rupee was launched in Mumbai, New Delhi, Bengaluru, and Bhubaneswar, comprising participating customers and merchants in a closed user group (CUG). Later other locations including Ahmedabad, Chandigarh, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla were added to the pilot programme in phases. The pilot began with four banks including State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank while four other banks — Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank joined it subsequently. Five more banks including Punjab National Bank, Canara Bank, Federal Bank, Axis Bank, and IndusInd Bank are in the process of joining the pilot.
The future of finance is digital, and with the Digital Rupee, India is poised to leap into this new era. The question is, are you ready to embrace this exciting change and step into the future.
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