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Economics

Digital Rupee Pilot Project

The retail version of the digital rupee (e-R) will launch its first pilot programme on December 1st, 2022, according to the Reserve Bank of India (RBI).

Where would be the pilot project launched?

  • Customers and merchants will be able to utilise the digital rupee (e-R), or e-rupee, in the four cities of Mumbai, New Delhi, Bengaluru, and Bhubaneswar, as part of the test.
  • The controlled introduction of the digital currency in these four cities will be carried out by four banks: State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank.
  • Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla will all receive the service in the future.
  • The pilot will include participation from four additional banks: Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank.

Central Bank Digital Currency (CBDC)

  • The CBDC/Digital Rupee is a digital currency issued by the RBI that is backed by assets such as gold, foreign exchange reserves, bonds, and other items that central banks recognise as monetary assets.
  • Although Bitcoin served as direct inspiration for the current notion of CBDCs, a CBDC is distinct from virtual currency and cryptocurrency.
  • Cryptocurrencies are not government-issued and do not have the legal tender status that has been established by the government.

Types of Digital Rupee

CBDC can be divided into two types according on how the digital currency is used and what functions it performs, taking into account the various accessibility levels:

  • It is an electronic version of cash primarily designed for retail transactions, general purpose (retail) (CBDC-R). Since it is a direct obligation of the central bank, it will be theoretically accessible to everyone, including the private sector, non-financial consumers, and enterprises. It can offer access to secure money for payment and settlement.
  • Wholesale (CBDC-W): It’s made with limited access to a few particular financial institutions in mind. In terms of operational expenses, the use of collateral, and liquidity management, it has the potential to revolutionise the settlement systems for financial transactions carried out by banks in the government securities (G-Sec) segment, the interbank market, and the capital market.

The forms of CBDC

  • E-rupee, or CBDC, can be set up as a token-based or account-based currency, according to the central bank.
  • Token-based CBDC: It would function as a bearer instrument, similar to banknotes, meaning that whoever is in possession of the tokens at any one time is assumed to be their owner. In doing so, the individual receiving a token will confirm that he actually is the owner of the token. Since it would be more similar to actual money, it is thought to be the ideal option for CBDC-R.
  • Account-based CBDC: This type of CBDC would need to keep track of all transactions and balances for each holder, as well as who is the rightful owner of any monetary amounts. In this situation, a middleman will confirm the account holder’s identification. For CBDC-W, this system may be taken into account.

The model for issuance

  1. The RBI is considering the direct model (single tier model) and the indirect model for the issuance and management of CBDCs (two-tier model).
  2. Direct model: In this case, the management of all facets of the digital rupee system, including issuance, record-keeping, and transaction verification, will fall under the purview of the central bank.
  3. An indirect model is one in which the role of the central bank and other intermediaries—such as banks and other service providers—is divided among them. In this approach, consumers will receive CBDC from the central bank indirectly through intermediaries, and the intermediary will handle any claims made by consumers.
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