The Reserve Bank of India is set to roll out its first pilot of the Central Bank Digital Currency (CBDC) with the launch of Digital Rupee (Wholesale segment) on Tuesday. The RBI on Monday said the symbol for denoting digital money will be e₹-W. It will be mainly used to settle secondary market transactions in government securities.
CBDCs are essentially central bank approved variant of digital money, a safer option than cryptocurrency which is difficult to regulate by government agencies and can be used for various illegal activities. “Central Bank Digital Currency (CBDC) is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country’s unique requirements,” RBI explained in a concept note.
Digital money is expected to reduce the inter-bank transaction costs. As of now the government is only launching e₹-W or digital money (wholesale) which can not be used like plastic money by regular consumers for their retail purchases. e₹-W can be accessed by only a selected financial institutions. CBDC (W) is intended for the settlement of interbank transfers and related wholesale transactions. However, RBI does
The Reserve Bank of India is set to roll out its first pilot of the Central Bank Digital Currency (CBDC) with the launch of Digital Rupee (Wholesale segment) on Tuesday. The RBI on Monday said the symbol for denoting digital money will be e₹-W. It will be mainly used to settle secondary market transactions in government securities.
CBDCs are essentially central bank approved variant of digital money, a safer option than cryptocurrency which is difficult to regulate by government agencies and can be used for various illegal activities. “Central Bank Digital Currency (CBDC) is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country’s unique requirements,” RBI explained in a concept note.
Digital money is expected to reduce the inter-bank transaction costs. As of now the government is only launching e₹-W or digital money (wholesale) which can not be used like plastic money by regular consumers for their retail purchases. e₹-W can be accessed by only a selected financial institutions. CBDC (W) is intended for the settlement of interbank transfers and related wholesale transactions. However, RBI does plan to introduce “Retail CBDC” as an electronic version of cash primarily meant for retail transactions at a later phase. “The first pilot in Digital Rupee – Retail segment (e₹-R) is planned for launch within a month in select locations in closed user groups comprising customers and merchants. The details regarding operationalisation of e₹-R pilot shall be communicated in due course,” informed RBI.
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.
As per concept note shared by RBI, 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. This is the model to be employed for e₹-W.
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.
The Indirect model is similar to the current physical currency management system wherein banks manage activities like distribution of notes to public, account-keeping, adherence of requirement related to know- your-customer (KYC) and anti-money laundering and countering the terrorism of financing (AML/CFT) checks, transaction verification etc.
Although CBDCs may be similar to Bitcoin in technology but the difference is that popular cryptocurrency lack the status of legal tender as opposed to the e currency released by RBI. Cryptocurrencies like bitcoin fluctuate, and may be wiped in days. That will not be the case with CBDCs.
“As the custodian of monetary policy framework and with the mandate to ensure financial stability in the country, the Reserve Bank of India has been consistent in highlighting various risks related to the cryptocurrencies. These digital assets undermine India’s financial and macroeconomic stability because of their negative consequences for the financial sector. Further, a wider proliferation of cryptocurrencies has the potential to diminish monetary authorities’ potential to determine and regulate monetary policy and the monetary system of the country which could pose serious challenge to the stability of the financial system of the country,” says RBI’s concept note.
