RBI’s e-Rupee

Why in news?

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

What is e-rupee?

• e-rupee or digital rupee is a digital version of the Indian rupee and is exchangeable one-to-one with the fiat currency.
• The digital rupee would appear as liability on a central bank’s balance sheet.
• Features- It must be accepted
  • as a medium of payment
  • as a legal tender
  • as a safe store of value by all citizens, enterprises, and government agencies
• It is freely convertible against commercial bank money and cash.
• It is a fungible legal tender for which holders need not have a bank account.
• It is expected to lower the cost of issuance of money and transactions.
• Issuance- RBI will issue e-rupee and it cannot be mined like bitcoin.
• Interest- RBI is not in favour of e-rupee with interest.
• Anonymity- For e-rupee, the RBI concept note has proposed partial anonymity where small amounts can be anonymous but not large amounts.

What other features were proposed by RBI?

Versions of CBDC

• The RBI has proposed to issue two versions.
• Retail CBDC- It will be potentially available for use by all — private sector, non-financial consumers and businesses.
• It can provide access to safe money for payment and settlement as it is a direct liability of the central bank.
• Wholesale CBDC- It is designed for restricted access to select financial institutions.
• It has the potential to transform the interbank settlements.

Forms of CBDC

• The central bank says that e-rupee can be structured as token-based or account-based.
• 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.
• It is preferred for CBDC-R as it would be closer to physical cash.
• Account-based CBDC- It would require maintenance of record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances.
• This system is to be considered for CBDC-W.

Model for issuance

• Two models for issuance and management of CBDCs were 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)- 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
• Foster financial inclusion
• Bring in resilience, efficiency in the payments system
• Add efficiency to the settlement system
• Boost innovation in cross-border payments space
• Provide the public with uses of private virtual currencies, without the associated risks
• Perceived as environment-friendly

10 countries already launched CBDC and 105 countries, which cover 95% of global GDP, are in the process of exploring CBDCs.

What are the risks in adopting digital currencies?

• Capital flight from bank accounts to digital wallets- Some fear that people may begin converting their bank deposits into digital cash.
• Effect on loans- The withdrawal of bank deposits can affect the amount of loans created by banks.
• Effect on RBI- When bank customers convert their deposits into digital rupee, the RBI will have to take these liabilities from the books of banks and onto its own balance sheet.

References

1. https://indianexpress.com/article/explained/explained-economics/pilot-launch-of-e-rupee-for-specific-use-cases-what-is-the-rbis-plan-8198117/
2. https://www.livemint.com/industry/banking/rbis-proposed-digital-rupee-10-things-to-know-11665203034030.html
3. https://www.business-standard.com/article/finance/the-who-what-when-where-and-why-of-central-bank-digital-currency-122100900349_1.html

Quickfacts

CBDC

• The world’s first digital currency- Sand Dollar by Bahamas.
• China introduced the e-CNY, the digital form of the Chinese yuan, at the Winter Olympics in Beijing.
• The latest CBDC launch- JAM-DEX by Jamaica.