Europe’s Digital Euro

Syllabus: GS3/Economy

Context

• The European Central Bank (ECB) is about to start the trial phase for its Digital currency, its “preparation phase” commenced in 2023.

Digital Euro

• A digital euro would be a digital form of cash, issued by the central bank and available to everyone in the euro area, available free of charge to everyone.
• It will be accessible and accepted in all euro area countries.
• The currency is meant to be the government’s alternative to existing cashless options such as credit cards, apps, cryptocurrencies, and bank transfers. 
• Digital euro can be used to pay directly from a digital wallet, on a smartphone or computer, without involving a bank or payment gateway. 
• The digital euro differs from other types of digital payment options because the ECB issues it directly. 

What is Digital Currency?

• Digital currency refers to any form of money or currency that is stored and transacted electronically. 
• Unlike physical currencies like coins or paper bills, digital currencies exist purely in digital form and can be used for online transactions. 
• There are two main types of digital currencies:
  • Cryptocurrency: This is a decentralized form of digital currency that uses cryptographic techniques for security and operates on blockchain technology. Examples include Bitcoin, Ethereum, Ripple (XRP), and Litecoin.
    • It is not controlled by government or a central bank, making them different from traditional money.
  • Central Bank Digital Currency (CBDC): This is a digital form of currency issued and regulated by a central bank.
    • It represent a country’s official currency in digital form. 
• Digital currencies offer several advantages:
  • faster transactions, 
  • reduced transaction fees, 
  • and the ability to conduct global transactions without intermediaries. 

Digital Currency in India

• India’s digital rupee, also referred to as eRs or eINR, is a central bank digital currency (CBDC) issued by the Reserve Bank of India (RBI).
• The RBI initiated the e-rupee pilot, a digital counterpart to physical currency, in 2022. 
• The RBI is exploring two types of digital currencies:
  • Wholesale CBDC (e₹-W): This is aimed at improving the efficiency of interbank settlements and payments between banks and financial institutions.
  • Retail CBDC (e₹-R): This is aimed at the general public for retail transactions, similar to how people use physical currency today.

Features

• It represents a tokenized digital version of the Indian rupee, operating on blockchain or distributed ledger technology.
• It serves as legal tender, accepted by individuals, businesses, and governmental bodies. 
• It is issued in accordance with the RBI’s financial policies and can be converted into physical cash through commercial banks.
• Transactions using the digital rupee are processed more quickly and securely compared to traditional banking systems. 

Significance

• Replacement for cash: While UPI allows to transfer money among individuals or businesses, e₹ can be used for purchases to FDs.
• Control: e₹ can be controlled by the RBI to be used for specific purposes only – such as subsidies or other expenses, exclusively. This is unlikely to be a direct transfer that may be misused.
• Lower costs: By bypassing intermediaries like credit cards or debit cards, the E rupee could lead to lower transaction fees.
• Financial inclusion: E-rupee accounts held directly with the central bank could offer a low-cost or free option for those without access to traditional banks.

Source: TH