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e-Rupee: Central Bank Digital Currency

27 December, 2022


          
            e-Rupee: Central Bank Digital Currency

As of December 01, 2022, India has implemented a central bank digital currency (CBDC) in 4 cities. The CBDC is aimed to complement, rather than replace, current forms of money and will provide an additional payment avenue to users, not replace the existing payment systems.

The move must be lauded as it is turning digital rupee into a reality and will require a robust cryptographic infrastructure based on sound blockchain technology.

Dileep Seinberg
Founder and CEO MuffinPay




However, the topic has been widely discussed and debated among policymakers and industry experts, not to mention two men who were talking about it in the metro yesterday

Person 1: Hey, have you heard about the Central Bank Digital Currency in India?

Person 2: No, what is it?

Person 1: It's like a digital version of the Indian rupee termed as e-Rupee, but better! It's issued and regulated by our central bank, so you know it's super trustworthy and reliable.

Person 2: So it's like electronic money that you can use to make digital payments and transactions?

Person 1: Exactly! It's like a digital genie that grants all your payment and collections at no costs. Just that, instead of rubbing a lamp, you use your smartphone!

Person 2: That sounds pretty much like the UPI I use. Are there any other benefits to using this digital currency?

Person 1: No, No, UPI is different. It is a payment mechanism for banks. CBDC is like currency in a digital wallet and will enable those who don’t have bank accounts to transact digitally.

Person 1: Hey, have you heard about the Central Bank Digital Currency in India?

Person 2: No, what is it?

Person 1: It's like a digital version of the Indian rupee termed as e-Rupee, but better! It's issued and regulated by our central bank, so you know it's super trustworthy and reliable.

Person 2: So it's like electronic money that you can use to make digital payments and transactions?

Person 1: Exactly! It's like a digital genie that grants all your payment and collections at no costs. Just that, instead of rubbing a lamp, you use your smartphone!

Person 2: That sounds pretty much like the UPI I use. Are there any other benefits to using this digital currency?

Person 1: No, No, UPI is different. It is a payment mechanism for banks. CBDC is like currency in a digital wallet and will enable those who don’t have bank accounts to transact digitally.




So What is the CBDC?

The CBDC is a digital version of the Indian rupee, issued and backed by the central bank. It can be used by individuals and businesses to digitally pay for a wide range of transactions, just like physical cash.

Some concerns by policy watchers were addressed by the RBI as numerous queries arose. You can watch the entire press conference here. click here.


How Is CBDC Different From UPI?

The Unified Payments Interface (UPI), is a payment system that enables individuals to make and receive payments using a mobile device while the CBDC is a digital currency that is issued and regulated by the RBI.


Any UPI transaction involves the intermediation of my bank. When I use a UPI app, a message goes to my bank. My bank account gets debited, money gets transferred to the recipient, to the receiver's bank. His bank sends a message to his mobile phone confirming the transfer. In CBDC, just like paper currency, you go to a bank, draw digital currency, and store it in your “wallet” (your mobile phone). And when you go and make a payment in a shop or to another individual, it will move from your wallet to their wallet. There is no intermediation of the bank in this case.”

Shaktikanta Das
RBI Governor



In UPI, there are two banks involved (sender & receiver) to complete the transaction whereas, CBDC is person-to-person (P2P) and person-to-merchant (P2M) with no intermediary involved. It involves the use of wallets between the P2P or P2M to transfer the currency.

Your bank is aware of transactions made through UPI, while CBDC is anonymous just like transacting with paper currency. While both UPI and CBDC use digital technology to facilitate financial transactions, they serve different purposes and have different features and capabilities.


Pros and Cons From A Government Perspective

Cost of cash management in India has continued to be significant. The total expenditure incurred on security printing during April 1, 2021 to March 31, 2022 was ₹4,984.80 crore as against ₹4,012.10 crore in the previous year (July 1, 2020 to March 31, 2021)10. This cost, which does not include the Environmental, Social, and Governance (ESG) cost of printing money, is predominantly borne by four stakeholders –General public, businesses, banks, and the Central Bank.- RBI’s Conceptual Note on CBDC


Pros

  • E-Rupee will completely remove the scope of printing, transporting, storing and distributing physical cash.
  • Increased access to financial services for underserved populations, such as those living in remote areas or those without access to traditional bank accounts, will support the financial inclusion in the underdeveloped areas.
  • Reduced settlement risk & transaction costs and improved speed and efficiency of financial transactions.
  • Counterfeiting with CBDC will be impossible because every currency will have an address and are verifiable.
  • Increased security and control over financial transactions, as users will have direct access to their digital currency through their digital wallet.
  • No threat of theft or losing unlike physical cash & wallet - In the current physical cash system, if you lose your wallet, or misplaced your cash, you lose your money. But with e-Rupee, if you lose your phone, your wallet can be re-installed and the money can be recovered as the bank is the custodian of money.
  • Potential for increased economic growth and productivity, as digital currency facilitates more efficient and seamless financial transactions.

Cons

However, there are also potential cons to consider, such as:

  • The consumers need to adapt to using and managing a digital currency, which may require training and education for some users.
  • No interest on wallet - Like cash in your pocket today does not earn interest, there will not be any interest on currency held in your wallet in digital form.
  • The potential for cyber security threats and financial fraud, as with any digital financial system.
  • However, RBI has assured to bring a legal framework to safeguard the privacy.


Conclusion

Overall, the implementation of a CBDC in India will be a complex and contentious issue, with both potential benefits and drawbacks. This pilot implementation is the first step to further enable advancement in the fintech & digital ecosystem in India. It will increase access to financial services for underserved populations and reduce transaction costs. The efficiency and speed of financial transactions will get better leading to increased economic growth and productivity.
However, the concerns about the potential risks and challenges associated with the adoption of a digital currency, such as cybersecurity threats and the potential loss of control over the monetary policy by the central bank will have to be addressed. Although, RBI has so far ensured that the system will be built in such that there will not be any issue of privacy, a structural regulation is needed to address this concern.


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