RBI to soon launch e-rupee: What is the digital currency and how is it different from cryptocurrency?

The Central Bank Digital Currency is a legal tender issued by the bank. The Reserve Bank said it will soon begin the pilot launch of e-rupee for specific use cases in the country

FP Explainers October 07, 2022 21:09:14 IST
RBI to soon launch e-rupee: What is the digital currency and how is it different from cryptocurrency?

The Reserve Bank of India said it will soon begin the pilot launch of e-rupee for specific use cases. News18 (Representational Image)

The Reserve Bank of India said today (7 October) it will soon begin the pilot launch of e-rupee for specific use cases.

Releasing a concept note on Central Bank Digital Currency (CBDC), the central bank said it will launch the digital currency with the aim to strengthen India’s digital economy, provide more efficient payment systems and keep a check on money laundering.

The paper also said the RBI’s digital currency is not meant to replace the existing payment systems but to render an additional route to users.

“Supported by state-of-the-art payment systems of India that are affordable, accessible, convenient, efficient, safe and secure, the Digital Rupee (e₹) system will further bolster India’s digital economy, make the monetary and payment systems more efficient and contribute to furthering financial inclusion,” the RBI said in the concept note.

“The Reserve Bank will soon commence pilot launches of e₹ for specific use cases. As the extent and scope of such pilot launches expand, RBI will continue to communicate about the specific features and benefits of e-rupee, from time to time,” the concept note added.

On 1 February this year, the central government had announced the launch of the digital rupee — CBDC from the fiscal year 2022-23 onwards in the Union Budget.

What is Digital Rupee? How is it different from cryptocurrencies like Bitcoin? Let’s decode.

What is CBDC?

The Central Bank Digital Currency is a legal tender issued in a digital form by a central bank, says the Reserve Bank.

“It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender, and a safe store of value. CBDCs would appear as a liability on a central bank’s balance sheet,” the RBI  said.

RBI to soon launch erupee What is the digital currency and how is it different from cryptocurrency

The Central Bank Digital Currency is a legal tender issued in a digital form by a central bank of any country. Moneycontrol (Representational Image)

RBI’s digital currency can be easily converted against commercial bank money and cash.

It will likely reduce the cost of issuance of money and transactions, says the RBI’s concept note.

Further, the RBI said CBDC is a “fungible legal tender” for which holders do not require to have a bank account.

The central bank digital currency is expected to generate huge sets of data in real time, RBI noted.

“After factoring in the concerns related to anonymity, appropriate analytics of Big Data generated from CBDC can assist in evidence-based policy making. It may also become a rich data source for service providers for financial product insights”, the concept note said.

Types of CBDC

Digital currency regulated by central banks can be classified into two types– general purpose or retail (CBDC-R) and wholesale (CBDC-W).

Retail CBDC, an electronic version of cash, would be available for everyone.

Wholesale CBDC is designed to give exclusive access to select financial institutions. This e-rupee will be used for the settlement of interbank transfers and related wholesale transactions, the paper said.

“It is believed that retail CBDC can provide access to safe money for payment and settlement as it is a direct liability of the central bank. Wholesale CBDC has the potential to transform settlement systems for financial transactions and make them more efficient and secure. Going by the potential offered by each of them, there may be merit in introducing both CBDC-W and CBDC-R,” the RBI said in its note.

How is CBDC different from cryptocurrency?

The RBI’s digital currency is different from cryptocurrencies which are decentralised and lack the tag of being a ‘legal tender’.

However, the concept of CBDC is inspired by cryptocurrencies and blockchain technology.

Unlike cryptocurrencies which are volatile assets, the CBDC is a fiat currency that is designed for stability and safety.

RBI to soon launch erupee What is the digital currency and how is it different from cryptocurrency

Cryptocurrencies are decentralised and lack the tag of being a ‘legal tender’. Firstpost (Representational Image)

Listing down the threats of using cryptocurrency, the RBI said, “The proliferation of crypto assets can pose significant risks related to money laundering & financing of terrorism. Further, the unabated use of crypto assets can be a Concept Note on CBDC 21 threat to the monetary policy objectives as it may lead to creation of a parallel economy and will likely undermine the monetary policy transmission and stability of the domestic currency. It will also adversely affect the enforcement of foreign exchange regulations, especially, the circumvention of capital flow measures.”

Which countries have CBDC?

As per Atlantic Council, 10 countries and territories have so far rolled out CBDCs including Jamaica, The Bahamas, Antigua and Barbuda, St Kitts and Nevis, Monserrat, Dominica, Saint Lucia, St Vincent and the Grenadines, Grenada and Nigeria.

Countries like the United States, Canada, the United Kingdom are also exploring introducing central bank-issued digital currency. China is also seeking to expand its use of digital yuan (e-CNY) which was launched earlier this year on a pilot basis.

With inputs from agencies

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