DIGITAL RUPEE - ECONOMY
News: RBI Digital Rupee pilot for wholesale segment from November 1
What's in the news?
● The
first pilot in the Digital Rupee, Wholesale segment (e₹-W) will commence on
November 1, 2022, the Reserve Bank of India (RBI) said in a circular.
Key takeaways:
● The
use case for this pilot is settlement of
secondary market transactions in government securities.
● Use of e₹-W is expected
to make the inter-bank market more efficient.
● Settlement
in central bank money would reduce transaction costs by pre- empting the need
for settlement guarantee infrastructure or for collateral to mitigate
settlement risk.
● Going
forward, other wholesale transactions, and cross-border payments will be the
focus of future pilots, based on the learnings from this pilot.
● Nine
banks namely State Bank of India, Bank of Baroda, Union Bank of India, HDFC
Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC have
been identified for participation in the pilot.
● The
first pilot in Digital Rupee - Retail segment (e₹-R) is planned for roll out
within a month in select locations in closed user groups comprising customers
and merchants.
● The
details regarding operationalization of e₹-R pilot will be communicated in due
course.
Concept Note:
● The
RBI also released a Concept Note on Central Bank Digital Currency (CBDC) for
India.
● The
purpose behind the issue of this Concept Note is to create awareness about
CBDCs in general and the planned features of the Digital Rupee (e₹), in
particular.
● It
explains the objectives, choices, benefits, and risks of issuing a CBDC in
India. The Note also seeks to explain Reserve Bank’s approach towards
introduction of the CBDC.
● The
Concept Note also discusses key considerations such as technology and design
choices, possible uses of Digital Rupee, issuance mechanisms, etc.
● It
examines the implications of introduction of CBDC on the banking system,
monetary policy, financial stability, and analyses privacy issues.
Go back to basics:
● The
central bank said that the development of CBDC could provide the public a risk-free virtual currency that will give them
legitimate benefits without the risks of dealing in private virtual currencies.
● The
approach for issuance of CBDC will be governed by two basic considerations such
as follows.
○ To
create a digital rupee that is as close as possible to a paper currency.
○ To
manage the process of introducing digital rupee in a seamless manner.
● The
central bank also feels that it is desirable for CBDCs to have offline
capabilities to make it a more attractive and accessible medium of payment for
a wide category of users.
Types of CBDC:
● Based
on the usage and the functions performed by the digital rupee and considering
the different levels of accessibility, CBDC can be demarcated into two broad
categories.
a. General
purpose (retail) (CBDC-R)
b. Wholesale
(CBDC-W).
1. CBDC - R:
● Retail
CBDC is an electronic version of cash primarily meant for retail transactions.
● It
will be potentially available for use by
all such as private sector, non-financial consumers and businesses and can
provide access to safe money for payment and settlement as it is a direct
liability of the central bank.
● However,
the RBI has not explained how e-rupee can be used in merchant transactions in
the retail trade.
2. CBDC - W:
● Wholesale
CBDC is designed for restricted access to select
financial institutions.
● It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market more efficiently and securely in terms of operational costs, use of collateral and liquidity management.
Forms of CBDC:
The central bank says e-rupee, or CBDC, can be structured as token-based or account-based.
1. Token-based CBDC:
● A
token based CBDC would be a bearer instrument like banknotes, meaning whosoever
holds the tokens at a given point in time would be presumed to own them.
● In
a token based CBDC, the person receiving a token will verify that his ownership
of the token is genuine.
● A
token-based CBDC is viewed as a preferred mode for CBDC-R as it would be closer to physical cash.
2. Account-based CBDC:
● An
account-based system would require maintenance of record of balances and
transactions of all holders of the CBDC and indicate the ownership of the
monetary balances.
● In
this case, an intermediary will verify the identity of an account holder.
● This system can be considered for CBDC-W, the RBI said.
What is the model for issuance?
There
are two models for issuance and management of CBDCs under the RBI’s
consideration such as
● Direct
model (single tier model)
● Indirect model (two-tier model).
1. Direct Model:
● In the direct model, the central bank will be responsible for managing all aspects of the digital rupee system such as issuance, account-keeping and transaction verification.
2. Indirect Model:
● An
indirect model would be one where the
central bank and other intermediaries (banks and any other service
providers), each play their respective role.
●In this model, the central bank will issue CBDC to consumers indirectly through intermediaries and any claim by consumers will be managed by the intermediary.
Advantages of e-rupee:
The
RBI said the key motivations for exploring the issuance of CBDC in India among
others include
● Reduction in operational
costs involved in physical cash management.
● Fostering
financial inclusion.
● Bringing
resilience.
● Efficiency and innovation in the payments system.
Can e-rupee be transacted in offline mode?
● The
offline functionality as an option
will allow CBDC to be transacted without the internet and thus enable access in
regions with poor or no internet connectivity.
● It
will also create digital footprints of the unbanked population in the financial
system, which will facilitate the easy availability of credit to them.
● However,
the RBI feels in the offline mode, the risk of ‘double-spending’ will exist
because it will be technically possible to use a CBDC unit more than once
without updating the common ledger of CBDC. But it can be mitigated to a larger
extent by technical solutions and appropriate business rules including monetary
limits on offline transactions, the central bank says.