Digital Rupee


    In News

    The Reserve Bank of India (RBI) said that the first pilot in the Digital Rupee, Wholesale segment (e?-W) will commence on November 1, 2022. 

    • It also announced that the first pilot in the Digital Rupee – Retail segment is planned for launch within a month in select locations in closed user groups comprising customers and merchants.

    What is Digital Rupee?

    Image Courtesy: ET 

    • A Central Bank Digital Currency (CBDC) or Digital Rupee is a digital form of currency notes issued by a central bank.
      • It is an electronic form of money that can be used in contactless transactions. 
    • It can be defined as the legal tender issued by the Reserve Bank of India.
    • Background: Presenting Union Budget 2022, Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) would be rolling out its digital currency soon.
    • Types : CBDC can be classified into two types
      • Retail (CBDC-R): Retail CBDC would be potentially available for use by all
      • Wholesale (CBDC-W) is designed for restricted access to select financial institutions.
    • Benefits :  the digital rupee system will “bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient.” 
      • It will reduce the transaction cost, having a digitised currency will make it easier for governments to access all transactions happening within the authorised networks. 
      • The lifeline of a digital currency will be indefinite compared to physical notes
      • “CBDC is aimed to complement, rather than replace, current forms of money and is envisaged to provide an additional payment avenue to users, not to replace the existing payment systems.
    •  Risks in adopting digital currencies
      • Cyber hacks and threats
      • Threat to privacy

    Difference between digital rupee and cryptocurrency

    • A cryptocurrency is a decentralised digital asset and a medium of exchange based on blockchain technology. However, it has primarily been controversial due to its decentralised nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities. 
    • On the Contrary, Central Bank Digital Currency (CBDC) issued by the Reserve Bank of India (RBI) will be a legal tender in a digital form.
    • The digital rupee will be different from Bitcoin, Ethereum and other cryptocurrencies in the sense it will be backed by the government. 
    • Secondly, having an intrinsic value on account of government backing, the digital rupee will be equivalent to holding a physical rupee equivalent.

    Future Prospects 

    • Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learnings from this pilot
    • To build a CBDC ecosystem and make it sustainable, it is essential to address all existing issues and for CBDC to act as a tool for inclusion by solving the problems through innovation.
    • There is also a need for strong cooperation between government agencies and regulatory bodies so that a balance is maintained and a proper data or information collection framework is implemented that oversees the ecosystem.

    Source: TH