e-RUPEE - ECONOMY
News: India's
digital rupee fails to excite interest, bankers say
What's in the news?
● A
month into India's pilot project for using an official digital rupee for
inter-bank and institutional transactions, stakeholders are seeing no benefits,
several bankers said.
Key takeaways:
● The
RBI has devised the e-rupee basically as a digital
alternative to cash - one using blockchain distributed-ledger technology, to
some degree anonymous and most relevant to consumers and retailers.
● But
in the initial trial banks, have been using it for settlements with each other
- with no particular advantage, according to bankers.
Central Bank Digital Currency (CBDC):
● 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.
● General
purpose (retail) (CBDC-R)
● 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.