RBI (Digital Currency or e-Rupee) - Central Bank Digital Currency (CBDC) for India

The Reserve Bank of India has issued a Concept Note on India's Central Bank Digital Currency (CBDC)

CBDC – Conceptual Framework

Central Bank Digital Currency (CBDC) is a digital representation of a central bank's currency notes. While most central banks throughout the world are considering issuing CBDC, the main reasons for doing so are unique to each country's needs.

This Concept Note describes the goals, options, benefits, and hazards of issuing a CBDC in India, also known as e-CBDC (digital Rupee). The e-rupee will be an alternative to the currently existing kinds of money. It is quite similar to banknotes, but because it is digital, it is likely to be easier, faster, and less expensive. It also has all of the transactional advantages of other types of digital currency.

The goal of issuing this Concept Note is to raise awareness about CBDCs in general, and specifically about the proposed features of the Digital Rupee (e). It describes the goals, options, advantages, and hazards of granting a CBDC in India. The Note also explains the Reserve Bank's strategy to implementing the CBDC.  This will address the crucial issues such as technology and design choices, potential uses of the Digital Rupee, issuance methods, and so on. It investigates the effects of CBDC implementation on the banking system, monetary policy, financial stability, and privacy problems.

The Reserve Bank will shortly begin piloting e-Rupee for particular use cases. RBI will continue to communicate about the unique features and benefits of e as the breadth and range of such trial launches develop.

Development of Indian Payment System

Development of Indian Payment System

India has made significant strides in digital payment innovation. India has created a distinct legislation for Payment and Settlement Systems, allowing for the orderly growth of the country's payment eco-system. The nation is proud of its current state-of-the-art payment systems, which are affordable, accessible, easy, efficient, safe, secure, and available 24x7x365 days a year. This notable shift in payment preference has resulted from the development of sophisticated round-the-clock electronic payment systems such as RTGS and NEFT, which have enabled smooth real-time or near-real-time fund transfers.

Furthermore, the development of mobile-based payment systems like as BBPS and National Electronic Toll Collection (NETC) to promote electronic toll payments have been landmark milestones that have altered the country's payments ecosystem and earned international prominence. The ease of use of these payment systems assured early acceptance since they presented customers with an alternative to using cash and paper to make purchases. The inclusion of non-bank FinTech enterprises in the payment ecosystem as PPI issuers, BBPOUs, and third-party application developers on the UPI platform has increased the country's use of digital payments.

Throughout this journey, the Reserve Bank has played the role of a catalyst towards achieving its public policy objective of developing and promoting a safe, secure, sound, efficient and interoperable payment system

What is RBI (Digital Currency or e-Rupee)?

CBDC is defined by the Reserve Bank as digital legal money issued by a central bank. It is the same as a sovereign currency and may be exchanged at par (1:1) with fiat cash. While digital money is prevalent in India—for example, bank accounts recorded as book entries on commercial bank ledgers—a CBDC would vary from existing digital money available to the public in that it would be a liability of the Reserve Bank rather than a commercial bank.

Features of CBDC (Digital Currency or e-Rupee) 

  • CBDC is sovereign currency issued by Central Banks in alignment with their monetary policy
  • It appears as a liability on the central bank’s balance sheet
  • Must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
  • Freely convertible against commercial bank money and cash
  • Fungible legal tender for which holders need not have a bank account
  • Expected to lower the cost of issuance of money and transactions

Types of CBDC (Digital Currency or e-Rupee)

Based on the usage and the functions performed by the CBDC and considering the different levels of accessibility, CBDC can be demarcated into two broad types viz. general purpose (retail) (CBDC-R) and wholesale (CBDC-W).

  • CBDC-R is potentially available for use by all private sector, non-financial consumers and businesses. In contrast, wholesale CBDCs are designed for restricted access by financial institutions. CBDC-W could be used for improving the efficiency of interbank payments or securities settlement, as seen in Project Jasper (Canada) and Ubin (Singapore). Central banks interested in addressing financial inclusion are expected to consider issuing CBDC-R.

  • CBDC–W has the potential to transform the settlement systems for financial transactions undertaken by banks in the G-Sec Segment, Inter-bank market and capital market more efficient and secure in terms of operational costs, use of collateral and liquidity management. Further, this would also provide coincident benefits such as avoidance of settlement guarantee infrastructure or the need for collateral to mitigate settlement risk.

Do India need (Digital Currency or e-Rupee)?

CBDC, the central bank digital currency, has a lot of promise in terms of maintaining transparency, minimal operational costs, and the possibility to expand current payment systems to meet the demands of a broader category of users.

CBDC is at the conceptual, development, or pilot stages all over the world. As a result, in the absence of precedent, considerable stakeholder input, as well as iterative technological design, are required to produce a solution that fits the criteria. While the goal of CBDC and the anticipated advantages are generally established, it is critical to create creative ways and compelling use cases that will make CBDC as appealing as, if not more appealing than, cash.

This Concept Note presents a high-level overview of the rationale for the introduction of CBDC in India, as well as its prospective design characteristics, consequences for different regulatory challenges, and probable technological platform needs. The inferences made here are exploratory in nature, but they appear to be the most appropriate at this time.

The strategy outlined in this Concept Note necessitates extensive preparation in terms of scope, cost, and timing to guarantee the timely implementation of various phases of CBDC implementation.