RBI also says that eRupee would encourage “competition, efficiency and innovation in payments
INDIA’s first Digital Rupee pilot project commenced on Tuesday with nine banks, including SBI, HDFC Bank and ICICI Bank, issuing the virtual currency for transactions in government securities. “…the first pilot in the Digital Rupee – Wholesale segment shall commence on November 1, 2022,” the Reserve Bank of India said yesterday. It also announced that the first pilot in digital Rupee – Retail segment is planned for launch within a month in select locations in closed user groups comprising customers and merchants.
What are the benefits of digital currency and is there any difference between central bank-issued digital currencies like the e-rupee and cryptocurrencies?
Crypto vs CBDC
Rapid digitalisation that began in the latter half of the 20th century ensured a turnaround in traditional production and business techniques. This in turn led to a tectonic shift in monetary matters. While fiat money — money that has no intrinsic value, but whose value is determined by the central bank of a country — has been around since the early twentieth century, it was not until cryptocurrencies took the globe by storm that serious thought was given to central bank digital currencies or CBDCs. And while cryptocurrencies come under the ambit of digital currencies, all digital currencies are not cryptographic in nature.
Two of the most popular cryptocurrencies are Bitcoin and Ethereum. In the long run, cryptocurrencies and other non-fungible tokens based on blockchain technology are seen to render banks redundant. They are decentralised, meaning that the issuer of the currency is not centrally controlled. On the other hand, CBDCs are mandatorily issued by central banks.
RBI has been steadfast in its opposition to private virtual currencies, such as Bitcoin and Ethereum. This is obvious since fiat currency is based on trust and needs to be monopolised to retain its value. In a keynote address delivered in February this year, RBI Deputy Governor T Rabi Sankar said, “…there would be parallel currency system(s) in the country.” He added that should such a move come about, India’s economic sovereignty would also be under threat.
Birth of CBDCs and the Digital Rupee
Besides removing the need to be dependent on private digital currencies, the two primary advantages of having a CBDC like eRupee are that it does not require an intermediary — such as a bank — for transactions and is often the cheapest way to trade currencies. They also pre-empt the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.
Already, paper currency use has been on the decline thanks to digital payments. Digital Rupee will reduce costs associated with physical cash management. This is not insignificant; according to RBI, Rs 4,984.80 crore worth of expenditure was incurred for the fiscal year 2021-22.
RBI also says that eRupee would encourage “competition, efficiency and innovation in payments.” Being the largest recipient of foreign remittances, India is also eyeing critically relevant improvements in cross-border transactions.
What is the Design of the Digital Rupee
Security, as well as technology considerations, rule the roost when it came to designing eRupee. There are other considerations one can delve into as well. Digital Rupee’s usage was also taken into mind when designing it. The first pilot is for wholesale use — designed for access by financial institutions and restricted to everyone else. It has been dubbed eRupee-W. The general-purpose digital Rupee is labelled as eRupee-W.
Without a shred of doubt, eRupee will have tremendous implications for government policy, particularly monetary policy, liquidity management and financial stability. It will also have legal ramifications. Since it is designed not to be truly anonymous, privacy and data protection concerns can only be speculated about. Perhaps only time will tell. What is certain is that this pilot project has been a giant leap for digitalisation and monetary policy in India.
