The Reserve Bank of India ("RBI") published a concept note on the Central Bank Digital Currency ("CBDC") also known as e₹ ("Digital Rupee") on October 7, 2022, outlining its goals, benefits, and potential drawbacks. Before introducing the Digital Rupee to the financial sector, the RBI wanted to raise awareness about it. Recent advancements in technology-based payment methods prompted the RBI to examine the advantages of a digital rupee, which has the potential to be a turning point in the history of money and might fundamentally alter the very nature of money and its uses. However, the RBI will be directed by the guiding principles for issuing CBDC as outlined by the Bank for International Settlement, which emphasizes the necessity for the digital rupee to co-exist with and supplement conventional forms of money. RBI's action was motivated by the thorough suggestions made by the Internal Working Group ("IWG") in February 2021, which focused on the introduction of the Digital Rupee as a new form of money. IWG was established by RBI in October 2020 to do research on the best design and implementation architecture for implementing CBDC in India while considering international advancements.
e₹: Retail CBDC and Wholesale CBDC
The retail CBDC and Wholesale CBDC are the two primary categories into which the RBI has divided the issue of CBDC. The Wholesale CBDC is designed for the settlement of interbank transfers and related wholesale transactions, whereas the retail CBDC will be accessible to anyone, i.e., the private sector, non-financial consumers, and enterprises. RBI launched the first trial for the Digital Rupee in the wholesale and retail sectors on November 1, 20221 and December 1, 2022,2 respectively.
The Wholesale CBDC was started to settle secondary market transactions in government securities in which nine banks were designated to participate, namely — 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.
The retail CBDC was designed to be printed in the same denominations as today's coins and paper money and the same was intended to be delivered through middlemen, namely banks. Users will be able to deal with Digital Rupee using a digital wallet provided by the participating banks and kept on mobile phones or other devices, and transactions can be both Person to Person ("P2P") and Person to Merchant ("P2M"). Eight banks have been chosen to take part in this pilot project in stages – State Bank of India, ICICI Bank, Yes Bank, IDFC First Bank, Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank.3 RBI's annual report for 2023-24 stated that five more banks (viz., Punjab National Bank, Canara Bank, Federal Bank, Axis Bank and IndusInd Bank) are in the process of joining the pilot.4 The pilot would initially focus on four cities—Mumbai, New Delhi, Bengaluru, and Bhubaneswar—and eventually expand to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.
Advantages of Digital Rupee
- Lower costs for managing money physically. The introduction of the digital rupee will lower the cost of printing physical currency, eliminate the procedures involved in its distribution throughout the nation, and reduce operational costs related to printing, transportation, storage, and costs of installation and setup of cash machines at locations where making physical cash available is difficult. To have a low cash economy.
- It will help in diversifying the range of payment options and will expand the choices already available to the customers which is expected to promote healthy competition in the financial market.
- It will support India's digital economy, promote financial inclusion, and improve the effectiveness of the monetary and payment systems.
- It can encourage innovation in cross-border payments, making these transactions rapid and helping to overcome significant hurdles relating to time zones, exchange rate disparities, as well as legal and regulatory requirements across nations. Additionally, the interoperability of CBDC offers ways to reduce the risks and frictions associated with cross-border and cross-currency transactions while enhancing the function of central bank money as an anchor for the payment system.
- Inadequate physical infrastructure, particularly in remote locations; insufficient connectivity; lack of availability of customized products; socio-cultural hurdles. With the right design decisions, CBDC might be able to offer the public a secure sovereign digital currency for a range of transaction requirements. It will increase the unbanked and underbanked population's access to financial services. By providing offline capability as a choice, it will be able to be transacted without the use of the internet, enabling access in areas with weak or nonexistent internet connectivity. Additionally, it will leave the unbanked population with digital traces within the financial system, facilitating their simple access to loans.
- The goal of the CBDC's introduction is financial inclusion; as such, it should offer offline functionality. 1.4 billion (143.3 crore) people live in India, and according to the RBI data, only 825 million of them have access to the internet.5 Due to a lack of connectivity, this means that many Indians won't be able to use CBDC. Offline capabilities must be provided in order to guarantee extensive CBDC use. In offline mode, however, there will be a risk of "double-spending" because it will be technically possible to use a CBDC unit more than once without updating the CBDC common ledger. However, this risk can be reduced to a greater extent by technical solutions and appropriate business rules, including a monetary limit on offline transactions.
- A trustworthy environment from beginning to end must be present throughout the whole lifecycle of a CBDC. The rise in digital payment-related frauds could potentially affect CBDCs in nations with lower levels of financial literacy. Therefore, it is crucial for any nation dealing with CBDC to ensure high standards of cybersecurity and parallel initiatives on financial literacy. For seamless cross-border transactions, the interoperability of networks will become important and therefore, it will be challenging for our country to come up with a system that is understandable to stakeholders when dealing with digital rupees across countries.
- Due to its digital character, CBDC is likely to cause problems for its consumers with regard to consumer protection. The dangers include occurrences involving cybercrime, data breaches, invasion of privacy, and cybersecurity. The customer protection framework for the CBDC must take into account the differences in consumer digital literacy as well as strategies to improve consumer knowledge and transparency so that they can make an informed decision when implementing the CBDC.
- Since the Unified Payments Interface ("UPI") has already made great headway in India, it would be a challenge for authorities to make people habituated to using Digital Rupee now as they both fall in the digital domain and for laymen the difference is hardly there.
We believe a great push is required from the central government to promote the use of e₹ at a large scale, because since the pilot program has begun Digital Rupee worth Rs. 5.70 crores as on March 31, 2023, is in circulation whereas the physical currency with public is at Rs 33.66 lakh crore as on May 5, 2023.6
Although, the introduction of Digital Rupee eases the burden of authorities in managing and storing physical currency amongst other advantages. However, changes/amendments will be required in the nation's monetary code about matters like the ability to issue CBDC, the amendments to the legal framework and criminal law protection from counterfeits, among other things. Since the current rules were passed before the advent of the digital age, as well as the problems associated with the issuance of digital currency, CBDC will need a robust legal framework.
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