e-Rupee: Here’s a Quixplained on India’s first official digital currency

Source: The post is based on the article “e-Rupee: Here’s a Quixplained on India’s first official digital currency” published in Indian Express on 2nd December 2022.

What is the News?

The Reserve Bank of India (RBI) has launched the Central Bank Digital Currency (CBDC) — digital rupee or e-rupee(e₹).

What is CBDC or the digital rupee?

CBDC is a legal tender issued by the RBI in digital form. It is the same as the fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different — it is not paper (or polymer) like physical cash. 

It is a fungible legal tender for which holders need not have a bank account.CBDC will also appear as ‘liability’ (currency in circulation) on the RBI’s balance sheet.

What are the types of e-rupee?

Based on usage and the functions performed by the digital rupee, and considering different levels of accessibility, the RBI has demarcated the digital rupee into retail and wholesale categories.

Retail e-rupee: It is an electronic version of cash primarily meant for retail transactions, which can potentially be used by almost everyone, and can provide access to safe money for payment and settlements.

Wholesale CBDC: It 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 and inter-bank market, and make the capital market more efficient and secure in terms of operational costs, use of collateral, and liquidity management.

How can an individual use the e-rupee?

E-rupees will be issued in the same denominations as paper currency and coins and will be distributed through the intermediaries, that is banks. Transactions will be through a digital wallet offered by the participating banks, and stored on mobile phones and devices.

Transactions can be both person-to-person (P2P) and person-to-merchant (P2M). For P2M transactions (such as shopping), there will be QR codes at the merchant location.

A user will be able to withdraw digital tokens from banks in the same way s/he can currently withdraw physical cash. S/he will be able to keep his/her digital tokens in the wallet and spend them online or in person or transfer them via an app.

How is this different from other wallets?

Not very different in terms of how it will be used. However, UPI-based apps like Google Pay and Paytm have a daily and per-transaction spending limit. The RBI has not fixed any limit on holding digital rupees in wallets. Digital rupee transactions above Rs 2 lakh are likely to be reported for tax matters.

How is RBI introducing the CBDC now?

RBI has now launched a pilot of CBDC which will initially cover four cities — Mumbai, New Delhi, Bengaluru and Bhubaneswar.

The pilot will work in a closed user group (CUG) comprising participating customers and merchants. Select customers from the selected cities will get CBDC wallets with notes printed digitally with the RBI Governor’s signature.

The scope of the pilot may be expanded gradually to cover more banks, users and locations.