All You Need to Know About Digital Rupee Pilot Project

Upgrade your UPSC CSE preparation with our daily Current Affairs wherein we talk about topics that make news at National and International level. Today we will talk about Digital Rupee Pilot Project and its relevance to the IAS syllabus.

For Prelims: Economics
Reserve Bank of India (RBI), Central Bank Digital Currency (CBDC), Bitcoin, Retail CBDC, Wholesale CBDC.

For Mains: GS Paper II
About Central Bank Digital Currency (CBDC), About the launch of Retail CBDC, About the retail digital rupee, Working of the Retail Digital Rupee, Significance of the Pilot launch for the retail e-rupee.

Context

Recently the Reserve Bank of India (RBI) announced the launch of India’s much-awaited Central Bank Digital Currency (CBDC), a sort of official cryptocurrency, for retail users from December 1.

Probable Question

Explain Central Bank Digital Currency (CBDC) and the significance of the launch of RBI’s pilot project. (150 words, 10 marks).

About Central Bank Digital Currency (CBDC)

• RBI has constantly opposed private digital currencies and had proposed to the government the widening scope of the paper rupee to include currency in a digital form.
• Thus, CBDC is the legal tender issued by a central bank in a digital form. 
• Its value would be the same as a paper currency and is exchangeable one-to-one with the fiat currency. 
• In short, a CBDC is no different from the cash that we hold in our wallets, except that it exists in a digital form. 
• The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
• Although the concept of CBDCs was directly inspired by Bitcoin, still, it is different from decentralized virtual currencies and crypto assets, which are neither issued by the state nor have the ‘legal tender’ status. 

About the Retail Digital Rupee

• In effect, the retail e-rupee will be an electronic version of cash, and will be primarily meant for retail transactions. 
• Usage: It will be potentially available for use by all the private sector, non-financial consumers, and businesses.
• Objective: It will provide access to safe money for payment and settlement, as it will be the direct liability of the central bank.

Kinds of the Digital Rupee

RBI has demarcated the digital rupee on the basis of usage, functions, and different levels of accessibility,  into two broad categories: 

General purpose (retail) CBDC

• Retail e-rupee is an electronic version of cash primarily meant for retail transactions.
• It can potentially be used by almost everyone and can provide access to safe money for payment and settlements.

Wholesale CBDC

• Wholesale CBDC was launched by the RBI to settle secondary market transactions in government securities.
• It is designed for restricted access to select financial institutions. 

Working of the Retail Digital Rupee

• The e₹-R would be in the form of a digital token that represents legal tender. 
• Denomination: It will be issued in the same denominations as paper currency and coins.
• Distribution: It will be distributed through intermediaries, i.e., banks.
• Transactions: Users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones and devices. Transactions can be both person-to-person (P2P) and person-to-merchant (P2M). 
• Payments: Payments to merchants can be made using QR codes displayed at merchant locations. 
• Features: The e₹-R would offer features of physical cash like trust, safety, and settlement finality. 

Also watch:

https://youtu.be/AVXYtTyRuGg

Advantages of the e-rupee

• Cost Reduction: It will reduce operational costs involved in physical cash management, fostering financial inclusion, and bringing resilience, efficiency, and innovation to the payments system.
• Efficiency: It will add efficiency to the settlement system.
• Innovation: It will boost innovation in the cross-border payments space.
• Risk Reduction: It will provide the public with uses that any private virtual currencies can provide, without the associated risks.
• Digital rupee has some clear advantages over other digital payment systems: payments are final, and thus reduce settlement risk in the financial system. 
• Interbank settlements: When CBDC is transacted instead of bank balances, the need for interbank settlements disappears. 
• Payment Systems: CBDC can also enable more real-time and cost-effective globalization of payment systems.

About the launch of Retail CBDC

• The recent launch on December 1 is the first phase of a pilot project that will cover selected locations and banks in a closed user group (CUG) comprising participating customers and merchants.
• The scope of the pilot may be expanded gradually to include more banks, users, and locations as needed.

Also Read : What are Digital Banking Units?

Significance of the Pilot launch for the retail e-rupee

• According to the central bank, the pilot will test the robustness of the entire process of digital rupee creation, distribution, and retail usage in real time.
• Leveraging blockchain technology for the e-rupee is a stepping stone for India becoming a $1 trillion digital economy. 
• The digital rupee based on transparent and efficient technology will provide customers with continuous access to the payment system, whether wholesale or retail.

Difference in CBDC from other wallets

• UPI-based apps like Google Pay, PhonePe, and Paytm have a daily and per-transaction spending limit. 
• The RBI has not fixed any limit on holding digital rupees in wallets. 
• Digital rupee transactions above Rs 2 lakh are likely to be reported for tax matters.

Difference in CBDC different from Cryptocurrency

• Private virtual currencies are not commodities or claims on commodities as they have no intrinsic value; claims that they are akin to gold seem opportunistic.
• Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. 
• Private currencies are neither money nor currency.
• Cryptos are not backed by the central bank; in fact, the RBI wants the government to ban cryptocurrencies in India. 

Vulnerability to cyber-attacks

• The RBI concept paper says CBDC ecosystems may be at similar risk for cyber-attacks as existing payment systems. 
• Cybersecurity considerations will need to be taken care of, both for the item and the environment.

News Source: The Indian Express

https://indianexpress.com/article/explained/explained-economics/digital-rupee-pilot-project-launching-on-december-1-what-is-it-and-how-will-it-work-8296610/

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