The Reserve Bank of India (RBI), India’s central bank and regulatory body responsible for the regulation of the banking system, launched the retail digital rupee pilot program on 1 December 2022. India has joined a select group of nations in launching its blockchain-based currency. It is a move that can highlight India’s preeminence in digitalized finance. To provide some context, even the United States has not yet launched its Central Bank Digital Currency (CBDC).
So, in this blog, let’s get a deeper look at the Digital rupee and how it’s different from other Cryptocurrencies.
What is Digital Rupee?
The digital rupee would be identical to the physical rupee, making transactions and settlements more convenient than ever before. It can be exchanged for fiat currency and serves as a secure store of value. It can also be a repository for physical cash or digital deposits. The digital rupee would be legal and accepted on the wholesale market, allowing for large transactions in RBI-issued government securities.
For transactions involving government securities, digital rupees will be issued as virtual currency. The rupee will exist in a virtual form similar to other cryptocurrencies, but it will be regulated by the Reserve Bank of India and will not be decentralized.
What are the main features of the Digital Rupee?
The simultaneous transition to digital payment methods will also bring its own set of advantages. As transactions become digital, the government will save money on currency printing. The transactions will be instantaneous and available in remote locations.
The following are some additional features of the digital rupee in India:
- The digital rupee would feature attributes of physical currency, such as reliability, security, and finality of settlement.
- With blockchain technology, the digital rupee will be more transparent and efficient.
- Users will be able to transact with digital rupees using a digital wallet provided by participating banks and stored on their mobile phones/devices.
- As with cash, it will not accrue interest and can be converted into other forms of money, such as bank deposits.
- Person-to-person (P2P) and merchant-to-consumer (P2C) transactions are both possible (P2M).
What are the types of CBDC (Central Bank Digital Currency) to be issued?
Central Bank Digital Currency (CBDC) is a central bank-issued digital form of currency notes. While the majority of central banks around the world are exploring the issuance of CBDC, the primary reasons for its issuance are country-specific and based on each nation’s requirements.
CBDCs can fall into different categories. There are two primary types of CBDCs:
- Wholesale CBDC: Wholesale CBDCs would be utilized primarily by financial institutions like banks. The use of CBDCs would enable banks to make faster and more automated payments. Transnational transactions may become more efficient and trustworthy. In their present form, payment settlement systems are limited to a single jurisdiction or currency. Using blockchain technology could potentially make transactions more efficient, trustworthy, and rapid.
- Retail CBDC: CBDCs for sale at retail would primarily be utilized by individuals. People could essentially use them as digital cash, secure in the knowledge that they are issued and backed by the country’s central bank. This innovation may supplant the need to carry physical currency and reduce the economic rents associated with transacting in the current financial system.
What are the Forms of CBDC?
The difference between a token-based and account-based approach to CBDC may be technical, but it has substantial implications for identity and access management, cost, and design.
- Account-based CBDC: Before a user is permitted to make a payment, an account-based method typically employs a trusted third party to verify their identity as the account holder and check their account balance. Accordingly, the accounts are debited and credited. This may introduce unnecessary overheads, and the need for additional verification steps may repeat flaws found in legacy systems of today.
- Token-based CBDC: Token-based verification, on the other hand, uses blockchain technology to eliminate the need to check a customer’s balance before allowing a transaction, so long as the token holder can prove they are the token holder by signing the transaction using a private key and meeting the appropriate identity requirements. Loss of a private key is frequently associated with a risk, but solutions exist to maintain ownership control in such situations. Without the need for an account, these systems can facilitate a more direct, cash-like method.
How is digital currency different from cryptocurrency?
- There is no direct comparison between the CBDC and cryptocurrency because the digital rupee is not a commodity or virtual asset.
- This digital rupee can be exchanged for cash, equivalent to the paper banknotes issued by central banks such as the RBI.
- The RBI will continue to issue CBDC, which will function similarly to banknotes but is not a decentralized asset like cryptocurrencies.
- The digital rupee operates on a private blockchain, whereas cryptocurrencies utilize a public blockchain in a decentralized infrastructure.
- Users who make payments with cryptocurrencies remain anonymous. Nevertheless, this is not the case with the digital rupee.
- The digital rupee reacts to inflationary pressure. Cryptocurrency, however, serves as a hedge against inflation.
How can the digital rupee benefit people?
The introduction of the digital rupee is an important step in India’s digital transformation. It will be a great opportunity for India, as it has the potential to increase the ease of doing business and improve the resilience and security of the entire payments infrastructure.
Here are some advantages of the digital rupee for the Indian population:
- Fraud: The Digital Rupee can aid in fraud prevention. This could be embedded programmability and regulated traceability.
- Cannot get physically damaged or lost: A digital currency will have an infinite lifespan compared to physical currency.
- Government Authorisation: Adopting the digital rupee is also likely to be a key factor in making Direct Benefit Transfers (DBT) easier to track, making them faster, and cutting down on fraud in the payment system. Increasing the efficiency of digital transactions will add another layer to digital governance.
- Cost cutting: Digitizing money will cut down on the costs of printing, distributing, and managing the logistics.
- Ease of transaction: One of the best things about the change is that you don’t even need a bank account to do the transactions.
Conclusion: Do We Need the Digital Rupee?
The introduction of the digital rupee is an important milestone on the road to realizing India’s “Digital India” ambitions. When it enters the mainstream, it would be easier for regular people and the government to get acquainted.
The digital rupee will increase transparency and efficiency by enabling real-time ledger maintenance and tracking. Since it is backed by the RBI, the digital rupee would mitigate the risk of volatility. It would provide all of the advantages of cryptocurrencies while preserving the safety net of regulated and legal tender.
In the beginning, the use of digital currency may present some challenges. However, the central bank has stated that it will use the pilot to learn, and based on what it discovers, it will offer future users a variety of features and applications.