Date: 05/12/2022

Relevance: GS-3: Science and Technology- developments and their applications and effects in everyday life.

Key Phrases: Central Bank Digital Currency, Legal Tender, Bearer-Instrument, Formalizing The Digital Consumption Of The Money, Leveraging Blockchain Technology.

Why in News?

• The Reserve Bank of India has recently launched the e-Rupee for retail users.

What is the retail e-Re?

• Digital form of legal tender or currency: E-Rupee (e-Re) is the common name associated with CBDC or central bank digital currency which is the digital form of legal tender or currency which will be in the form of a digital token representing a claim on the central bank.
• Fungible legal tender: It is a fungible legal tender, for which holders need not have a bank account. It is the same as the fiat currency, and is exchangeable one-to-one with the fiat currency; only its form is different i.e., it is not paper (or polymer) like physical cash.CBDC will appear as a ‘liability’ (currency in circulation) on the RBI’s balance sheet.
• Bearer-instrument: A token CBDC is a “bearer-instrument” like a banknote, meaning whoever ‘holds’ the tokens at a given point in time will be presumed to own them. It can be transferred electronically from one holder to another.

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-rupee: CBDC 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 is RBI introducing the CBDC?

• Four banks – SBI, ICICI Bank, IDFC First Bank, and YES Bank – will participate in the first phase of the pilot, and four more banks – HDFC Bank, Bank of Baroda, Union Bank and Kotak Mahindra Bank will subsequently be added to the plan, which would cover 13 cities in a phased manner.
• Just like how telecom operators launch products, e-Re will also be tested on closed user groups or CUGs.

What will be its uses?

• The retail version of e-Re can be used by individuals for all transactions, where they use cash to buy things, to give to friends or relatives, to repay debt, etc.
• To begin with, the uses will be limited as merchants and users would be restricted to the CUG.
• While there are no specific transaction limits in value or volume terms, in the initial phases, e-Re may be limited to low-ticket usages.

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 she can currently withdraw physical cash. She will be able to keep her digital tokens in the wallet, and spend them online or in person, or transfer them via an app.

Why is the RBI moving towards the e-Re?

• There is a cost incurred in printing, transporting, and storing currencies and coins that can be rationalised through e-Re.
• The larger use case envisaged by the government is financial inclusion and formalizing the digital consumption of the money.
• E-Re is also targeted at those who don’t have a bank account, but can use digital currencies similar to a pre-paid mobile recharge card.Likewise, it is not aimed at just smartphone users, but every person with a mobile phone.

How is this different from other wallets?

• It is 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.

What are the benefits of e-rupee?

• Digital rupee has some clear advantages over other digital payments systems: payments are final, and thus reduce settlement risk in the financial system.
• When CBDC is transacted instead of bank balances, the need for interbank settlement disappears. CBDC can also enable more real-time and cost-effective globalization of payment systems.
• Along with reducing operational costs associated with physical cash management, it will also enhance settlement efficiency and spur innovation in cross-border payments and offer the public the same uses as any private virtual currency without the risks associated with it.

What could be the challenges with retail e-Rupee?

• From a customer perspective, whether merchant or retail, UPI has established ease of use. Therefore, e-Re needs to prove that it is equally user-friendly with sound technology and data privacy provisions, to lure users.
• Users also face digital theft such as hacking and virus attacks, which could deter some people.
• The cultural and social mindset in the country, which leads to greater use of physical currency, is also a hindrance.

What was the need to introduce the e-rupee?

• Leveraging blockchain technology for the e-rupee is a stepping stone for India becoming a $1 trillion digital economy.
• India is witnessing massive growth in digital transactions — the volume and value of UPI transactions increased by 118 percent and more than 98 percent respectively in Q2 2022 compared to Q2 202.
• The digital rupee based on transparent and efficient technology will provide customers with continuous access to the payment system, whether wholesale or retail.

Source: Hindu BL

Mains Question:

Q. Explain the salient features of central bank digital currency (CBDC) recently launched by the RBI. How is it different from other UPI and wallet transactions? (150 words).