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Is India's Digital Rupee (e₹) the future of money?
Did you know that, as per Atlantic Council, 114 countries, representing over 95% of global GDP, are currently exploring the idea of Central Bank Digital Currency (CBDC)? It's a significant increase compared to May 2020 when only 35 countries were considering it. Currently, around 60 countries are in an advanced phase of exploration (development, pilot, or launch). And so far, 11 countries have successfully launched their digital currencies.
China's pilot program, which already reaches a staggering 260 million people, is planning to expand its CBDC to cover most of the country in 2023. Jamaica has also recently joined the list by introducing its own CBDC called the JAM-DEX.
Looking ahead to 2023, more than 20 countries are expected to take major steps in piloting their CBDCs. Countries like Australia, Thailand, Brazil, India, South Korea and Russia have plans to either continue or initiate pilot testing.
This global interest in CBDCs is exciting, and that’s make it important for you to understand what is CBDC and the progress made by India in this area. So, let’s deep dive –
In India, the CBDC is called the Digital Rupee or e₹. It's the digital version of the regular currency, you use. Just like physical money is printed and issued by the RBI, the CBDC is created digitally and issued by the RBI in the same denominations as notes and coins. The RBI backs it up, so it's considered legal tender and holds its value securely. Similar to physical cash, the Digital Rupee doesn't earn any interest, but you can convert it into other forms of money like bank deposits. Being a sovereign currency, it carries the trust, safety, liquidity, settlement finality, and integrity that you associate with central bank money.
The benefits of CBDC are numerous. They include lower operational costs, as there is no need to print, store, transport, or replace physical banknotes. Storing and transferring large sums of physical cash becomes easier and safer with the Digital Rupee. Counterfeiting risks are reduced with digital currencies. Transactions are faster, cheaper and available 24/7, overcoming limitations like turnaround times, batch runs, bank holidays, transaction limits, long clearing and settlement process. Security is improved through the use of blockchain technology and advanced encryption, ensuring resistance to fraud and hacking. CBDC can also streamline government payments (Direct Beneficiary Transfer) and enable efficient implementation of schemes and policies at grassroot level. For example, a certain amount of digital currency meant for a MGNREGA beneficiary can only be received and used by such a person.
CBDC will also improve digital penetration and financial inclusion by offering access to digital currency in remote areas with no or limited electrical power or mobile network. In respect of such offline transactions, it is essential for wallets to have the ability to verify CBDC transactions independently, without relying on server communication in order to ensure the authenticity of the transactions. However, periodic power and network connectivity would still be necessary for tasks such as reloading or redeeming CBDC balances and synchronizing local wallet balances with central servers.
Sounds rosy, but at the back of mind, everybody is still stuck on:
Achieving complete anonymity in digital transactions is challenging, as they leave a digital trail. Apex Bank need to strike a balance between privacy and preventing illicit transactions. While some level of privacy can be incorporated, fully matching the anonymity of physical cash is unlikely. Anonymity poses a policy trade-off, as more anonymity increases the risk of illicit use. However, the principle of Managed Anonymity may be look up to i.e., ‘anonymity for small value and traceable for high value,’ akin to anonymity associated with physical cash. Protecting personal information and data privacy would also be critical to broader adoption.
In India, the Digital Rupee is undergoing two pilots, one in the wholesale segment (from November 2022) and another in the retail segment (from December 2022). The use case of wholesale pilot was the settlement of secondary market transactions in government securities for financial institutions and of the retail pilot was usage of Digital Rupee for retail transactions. Customers and merchants can participate in pilot through an invite-based process.
These pilots help the RBI explore the features, applications, and technical aspects of the Digital Rupee while testing its acceptance and usability amongst the users. It tests the entire process of creating, distributing, and using the Digital Rupee in real-time.
The RBI's annual report for 2022-23 indicated that the pilot results have been satisfactory so far, and the value of digital currency in circulation was INR 16.39 crores as on 31st March 2023. Currently, the RBI aims to onboard 1 million users in the pilot project by the end of June, and also plans for interoperability between the CBDC and UPI QR codes are underway. However, it says that as of now, there is no fixed date for the official launch of the CBDC.
To use the Digital Rupee, the (invited) users need to install the required CBDC application, register with their phone number linked to a bank account, and load money into the wallet from their bank account by choosing denominations. Transactions can be made using Virtual Payment Address, mobile number, or QR code. Digital Rupee can only be sent and received among Digital Rupee users. While a linked bank account is not necessary for using the Digital Rupee as legal tender, it is required for loading or withdrawing money from the wallet. The e₹ can be redeemed by crediting the amount back into the bank account, and transactions through the Digital Rupee app are free of charge.
The Digital Rupee is a digital version of physical currency. On the other hand, UPI is a platform that enables instant money transfers between bank accounts using mobile phones. UPI operates on the IMPS service, facilitating real-time transfers between different banks. While UPI transactions involve a request, and clearance and settlement process through intermediaries, the Digital Rupee allows direct transfers between mobile wallets. Additionally, the Digital Rupee uses denominations like physical currency, whereas UPI transactions are amount-based.
CBDCs are created, managed and backed by central banks, and intended for everyday transactions. In contrast, cryptocurrencies are decentralized, not controlled by any central authority, and often used as investment assets. CBDCs offer stability in value and security due to government backing, while cryptocurrencies can be subject to market fluctuations and hacking risks. The changing financial landscape and the popularity of cryptocurrencies have prompted central banks to explore their own digital alternatives to keep up with evolving payment methods.
In conclusion, Digital Rupee is aimed at complementing existing forms of money and providing an additional payment avenue. They are not intended to replace current payment systems but to coexist with them. Moreover, the progress made by India in exploring and piloting the Digital Rupee is significant and is worth looking forward to.
