RBI unveils features of digital rupee, plans to launch pilot soon

Source: The post is based on the article “RBI unveils features of digital rupee, plans to launch pilot soon” published in the Business Standard on 8^th October 2022.

What is the News?

The Reserve Bank of India (RBI) is exploring the possibility to launch its own digital currency or digital rupee (eRe) with minimal disruption to the financial system.

What is the digital rupee (eRe)?

The RBI recently released a concept note on CBDCs. The concept note said that the eRe will provide an additional option to the currently available forms of money. It is substantially not different from banknotes, but being digital, it is likely to be “easier, faster, and cheaper”.

eRe also has all the transactional benefits of other forms of digital money.

eRe will be exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender, and a safe store of value.

The retail CBDC can provide access to safe money for payment and settlement as it is a direct liability of the central bank. The wholesale CBDC has the potential to transform the settlement systems for financial transactions and make them relatively efficient and secure.

What are the two models of eRe?

Two models are being examined for the issuance and management of CBDCs.

a) Direct model (single-tier model): Under this, the central bank will be responsible for managing all the aspects of the CBDC system, such as issuance, account-keeping, and transaction verification.

b) Indirect model (two-tier model): Under this model, the central bank will issue the CBDC to consumers indirectly through intermediaries (banks and any other service providers) and any claim by consumers is managed by the intermediary because the central bank will only handle wholesale payments to intermediaries.

The indirect model is akin to the current physical currency management system.

What are the various types of CBDCs?

Two forms of CDBCs are being discussed: Token-based and account-based.

Token-based CBDC: It shall be a bearer instrument like banknotes, meaning whosoever holds the tokens at a given point shall be presumed as the owner. 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-retail as it will be closer to physical cash.

Account-based CBDC system: It will require maintenance of the record of balances and transactions of all holders of CBDCs and indicate the ownership of monetary balances. In this, an intermediary verifies the identity of an account holder.

Account-based CBDC may be considered for CBDC-wholesale.

What is the choice of technology for eRe?

The infrastructure of CBDCs can be on a conventional centrally controlled database or on distributed ledger technology.

What are the other details mentioned in the concept note on eRe?

The concept note also discussed the need for incorporating all the features that physical currency represents, including anonymity and universality.

The use of the offline feature in CBDC would also be beneficial in remote locations and offer availability and resilience benefits when electrical power or mobile network is not available

According to the concept note, the key motivations for exploring the issuance of CBDC in India include a) reduction in operational costs involved in physical cash management, b) efficiency and innovation in the payments system, c) boosting innovation in cross-border payments space, and d) providing the public with uses that any private virtual currencies can provide, without the associated risks.