Pilot launch of E-Rupee

Context:

The Reserve Bank of India (RBI) has indicated that it will soon commence limited pilot launches of e-rupee (e`), or Central Bank Digital Currency (CBDC) or digital rupee, for specific use cases.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. What’s RBI’s plan?
2. What is E-rupee?
3. What are the forms of CBDC?
4. What’s the model for issuance?
5. What are the advantages of e-rupee?
6. Can e-rupee be transacted in offline mode?

What’s RBI’s plan?

• The central bank said that the development of CBDC could provide the public a risk-free virtual currency that will give them legitimate benefits without the risks of dealing in private virtual currencies.
• The approach for issuance of CBDC will be governed by two basic considerations —
  • To create a digital rupee that is as close as possible to a paper currency
  • To manage the process of introducing digital rupee in a seamless manner.

What is E-rupee?

• E-rupee is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. 
• Only its form is different. It can be accepted as a medium of payment, legal tender and a safe store of value.
• The digital rupee would appear as liability on a central bank’s balance sheet.

What are the types of e-rupee?

Based on the usage and the functions performed by the digital rupee and considering the different levels of accessibility, CBDC can be demarcated into two broad categories —

Retail CBDC

• It is an electronic version of cash primarily meant for retail transactions.
• It will be potentially available for use by all — private sector, non-financial consumers and businesses — and can provide access to safe money for payment and settlement as it is a direct liability of the central bank.
• However, the RBI has not explained how e-rupee can be used in merchant transactions in the retail trade.

Wholesale CBDC

• It is designed for restricted access to select financial institutions.
• It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market more efficiently and securely in terms of operational costs, use of collateral and liquidity management.

What are the forms of CBDC?

The central bank says e-rupee, or CBDC, can be structured as

Token-based CBDC

• It would be a bearer instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them.
• In a token-based CBDC, the person receiving a token will verify that his ownership of the token is genuine.
• A token-based CBDC is viewed as a preferred mode for CBDC-R as it would be closer to physical cash.

Account-based system

• It would require maintenance of record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances.
• In this case, an intermediary will verify the identity of an account holder.
• This system can be considered for CBDC-W.

What’s the model for issuance?

There are two models for issuance and management of CBDCs under the RBI’s consideration —

Direct model (single tier model)

• The central bank will be responsible for managing all aspects of the digital rupee system such as issuance, account-keeping and transaction verification.

Indirect model (two-tier model).

• An indirect model would be one where the central bank and other intermediaries (banks and any other service providers), each play their respective role.
• In this model, the central bank will issue CBDC to consumers indirectly through intermediaries and any claim by consumers will be managed by the intermediary.

What are the advantages of e-rupee?

• Reduction in operational costs involved in physical cash management,
• It will foster financial inclusion,
• It will bring resilience, efficiency and innovation in the payments system.
• It will add efficiency to the settlement system and boost innovation in cross-border payments space and provide the public with uses that any private virtual currencies can provide, without the associated risks.

Can e-rupee be transacted in offline mode?

• The offline functionality as an option will allow CBDC to be transacted without the internet and thus enable access in regions with poor or no internet connectivity.
• It will also create digital footprints of the unbanked population in the financial system, which will facilitate the easy availability of credit to them.
• However, the RBI feels in the offline mode, the risk of ‘double-spending’ will exist because it will be technically possible to use a CBDC unit more than once without updating the common ledger of CBDC.
• But it can be mitigated to a larger extent by technical solutions and appropriate business rules including monetary limits on offline transactions.

-Source: Indian Express