Digital Rupee in the Digitalized World

· What is a Digital Rupee?

    “Digital currency is basically a payment system that involves digital transactions in electronic form and is not physically tangible like a rupee.” – Rachit Chawla, the CEO of Finway FSC.

    As we know, the INR, or simply, the rupee, is a non-electronic, uniform, portable and durable means of exchange. With all these features, a question would arise – “Is there a need to introduce any other exchange”? Well, if there are no questions about its creditability, then the answer would be “why not”? With such an intent, the Reserve Bank of India (RBI) launched India's first digital rupee pilot project on November 1, 2022. The digital rupee (e₹), also known as Central Bank Digital Currency (CBDC), is a digital form of currency notes issued by the central bank of India, the Reserve Bank of India.

    The digital rupee is electronic money, which makes it more durable than regular currency. being digital it is likely to be easier, faster, and cheaper. It also has all the transactional benefits of other forms of digital money.

    "The digital rupee ideated by RBI will be generated through an advanced payment system that is affordable, accessible, convenient, efficient, safe, and secure and aims at further bolstering the digital economy. However, it should be noted that the concept of initiating digital currency is only to complement the existing forms of financial transaction and not replace them. It will provide users with an additional option for making payments, while the existing payment system is still in place. Hence, it can be safely stated that digital currency will have no effect on general currency usage." -  says Rachit Chawla.

     The e₹ will be used for issuing virtual currency for transactions in government securities. The money will be in virtual form just like other cryptocurrencies, but the digital rupee will not be decentralized, it will be regulated by the Reserve Bank of India (RBI). Regulation and decentralization are what sets the e₹ different from regular currency. Being legal and acceptable, the digital rupee proves to be of great importance to the Indian Government. 

     A Central Bank Digital Currency (CBDC) or Digital Rupee is a digital form of currency notes issued by a central bank. Digital currency or the rupee is an electronic can be used in contactless transactions. Presenting Union Budget 2022, Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) would be rolling out its digital currency soon.

 

· How exactly is digital money different from cryptocurrency?

      Mahesh Shukla, CEO & Founder PayMe said, "There is no direct comparison between the CBDC (Central Bank Digital Currency) and cryptocurrency because the digital rupee is not a commodity or virtual asset, contrary to cryptocurrencies. Moreover, crypto coins are not exactly money."

     This digital rupee can be exchanged for cash, equivalent to the banknotes that central banks like the RBI issued in paper form. This means that there is no difference with respect to the value of both currencies. To explain it further, 1 INR = 1 e₹.

· Some objectives of the Digital Rupee?

1. Since cryptocurrencies are becoming more and more popular, the Reserve Bank of India’s prime objective for launching the pilot project on digital currency is to advance India in the race for virtual currencies.

2. The launch will undoubtedly change the game since the digital rupee will improve efficiency and transparency because of the application of blockchain technology.

3. Both wholesale and retail customers will have constant access to the payment system making it transparent. Indian customers can pay directly, saving transaction costs and enabling real-time account settlements. Additionally, using a digital rupee will speed up cross-border transactions and eliminate the need to open a bank account.

· Impact of the Digital Rupee

1. The wholesale CBDC has the potential to transform the settlement systems for transactions and make them even more feasible for users. This will also bolster the country’s overall digital economy and bring in more financial inclusion.

2. Reserve Bank of India (RBI) launching the pilot project on Central Bank Digital Currency (CBDC) is projected to make the interbank market more efficient and secure. 

3. As stated by the apex bank, the move will reduce transaction costs by preempting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.

4. Initially, the RBI rolled out digital currencies for the wholesale sector. The central bank has ideated wholesale CBDC for the settlement of interbank transfers and related transactions.

5. The reserve bank will make available the CBDC for the retail sector too. Furthermore, the use of the digital rupee will speed up cross-border transactions, even for users linked to a particular bank account. 

· Which nine banks will participate in the wholesale pilot project?

     The RBI has selected nine banks for participation in the digital rupee's wholesale pilot project. This includes a series of national and international banks like the 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.

This digital rupee can be exchanged for cash, equivalent to the banknotes that central banks like the RBI issued in paper form. The RBI will continue to issue the CBDC, which will serve the same function as banknotes but is not a decentralized asset like cryptocurrencies.

· Conclusion

     The RBI has been exploring the pros and cons of a central bank digital currency for some time. It also announced that the first pilot in the digital rupee - Retail segment is planned for launch within a month in select locations in closed user groups comprising customers and merchants.

Covered by: Aanuj Shrotriya