Introduction:
The Reserve Bank of India will soon begin limited pilot launches of the digital rupee for specific use cases. A concept note on the central bank digital currency was released on Friday. It explains the objectives, choices, benefits and risks of issuing digital rupees. The 51-page document also discusses key considerations such as technology and design choices, potential uses of the digital rupee, issuance mechanisms… while examining the impact of CBDC adoption on the banking system, monetary policy, financial stability and privacy issues.
What is the CBDC or national digital currency?
- A central bank digital currency (CBDC)or national digital currency, is simply the digital form of a country’s fiat currency.
- Instead of printing paper money or minting coins, the central bank issues electronic tokens. This token value is backed by the full trust and credit of the government.
Functionality of e-RUPI:
- e-RUPI is a cashless and contactless digital means of paymentsent to beneficiaries’ mobile phones in the form of an SMS string or QR code.
- Essentially, this will be like a prepaid gift card, redeemable at designated merchant locations without a credit or debit card, mobile app, or internet banking.
- e-RUPI connects the sponsors of the services with the beneficiaries and service providers in a digital way with no physical interface.
- However, it is important to note that e-RUPI is neither a cryptocurrency nor a central bank digital currency (CBDC). It’s also not a digital or e-wallet, which admittedly may sound strange to some.
Need for a CBDC:
- The Growth of cryptocurrencies like bitcoin, ethereum etc. has challenged fiat currencies.
- Along with their other vulnerabilities, each country’s central bank has been exploring the possibility of launching their own digital currencies.
- A 2021 BIS survey of central banks found that 86% were actively exploring the potential for such currencies, 60% were experimenting with the technology, and 14% were piloting them.
- The need for interbank settlement would be eliminated as it would be a central bank liability that would be transferred from one person to another.
India future in digital currency:
According to RBI, there are at least four reasons why digital currencies are expected to do well in India:
- First, there is an increasing penetration of digital payments in the country, which coexists with an ongoing interest in using cash, particularly for low-value transactions.
- Second, India’s high currency-to-GDP ratio, according to RBI, “offers another benefit of CBDCs.”
- Third, the proliferation of private virtual currencies like Bitcoin and Ethereum could be another reason why CBDCs are becoming important from a central bank perspective.
- Fourth, the central bank digital currency (CBDC) could also cushion the general public in an environment of volatile private VCs
Meaning of e-RUPI and how it differs from a digital currency:
- The government is already working on the development of a central bank digital currency, and the launch of e-RUPI could potentially reveal the gaps in the digital payments infrastructure that will be required for the success of the future digital currency.
- In fact, e-RUPI is still backed by the existing Indian rupee as the underlying asset and the specificity of its purpose distinguishes it from a virtual currency and brings it closer to a voucher-based payment system.
- Also, the ubiquity of e-RUPI in the future will depend on the end use cases.
- Even the private sector can use these digital vouchers as part of their employee welfare and corporate social responsibility programs.
Diploma:
- According to the government, e-RUPI is easy, safe and secure as it keeps the details of the beneficiaries completely confidential.
- The entire transaction process using this voucher is relatively faster and at the same time reliable, since the required amount is already stored in the voucher.
- e-RUPI is expected to ensure leakproof delivery of social services. It may also be used to provide services within programs.
- The government also said even the private sector can use these digital vouchers as part of their worker welfare and corporate social responsibility programs.
- It also guarantees that the service provider will not be paid until the transaction is completed.
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