RBI’s digital rupee pilots this year

RBI has already announced that it will pilot Central bank digital currency, the digital equivalent to the rupee, this year, read here to know what it means.

Hyderabad: RBI announced that it will pilot Central bank digital currency (CBDC), the digital equivalent to the rupee, this year. RBI feels it could become a tool for reducing time and cost for cross-border transactions. Here is what it means.

What is CBDC?

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CBDC is a digital currency that will be issued by the RBI and will be universally accessible. It will be available around the clock and privacy issues taken into account to eliminate counterparty credit risks. It is the same as the existing currency and can be exchanged from one to the other. Instead of paper, it will be in a digital format. This will aid in being a less–cash society. Each digital currency note will be a sovereign-backed facility and will have a unique number, just like the paper currency. The units issued in digital rupee would be included in the total currency in circulation. CBDC will be a fiat currency like the existing ones. Fiat currency is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but by the Government that issues it. Both CBDC and physical cash would be legally acknowledged as a form of payment and act as a claim on the RBI or the Government.

Lower cost of transactions

India has a cheap and fast domestic payments system but the cost of cross-border payment is still high. Introduction of CBDC will address this issue as well. CBDC systems will be able to talk to each other and therefore the time needed to settle transactions will also come down. However, there will be associated risks which need to be evaluated against the benefits. The onus will be on ensuring that the system is robust to ensure that technical failures of transactions and fraud instances are kept to a minimum.

Blockchain-based transactions

The digital currency or CBDC can be transacted using wallets backed by the digital rupee blockchain, being developed by the Reserve Bank. The digital rupee will be with the RBI and from there it could be transferred to any merchant based on the transactions. While it will be based on the blockchain system, it is not a cryptocurrency, which is not issued by the State and lacks the ‘legal tender’ status. The Government has already said that private cryptocurrencies will never be a legal tender in India. The RBI too has been opposing cryptocurrencies considering implications on national security and financial stability.

Lower dependency

CBDCs reduce dependency on cash, lead to higher seigniorage (the difference between the value of money and the cost to produce and distribute it) due to lower transaction costs, reduced settlement risks. The Government had earlier received a proposal from Reserve Bank of India in October 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form.

Rising preference

RBI in its `Payments Vision 2025’ document said CBDC has been gaining traction with 86% of the central banks globally reviewing its feasibility for cross-border transactions as well as for internal benefits. CBDC is also an area of interest for G20 under its priority initiative to enhance cross-border payments. Various use cases will be studied and explored to bring in further efficiencies in domestic and cross-border payment processing and settlement using CBDCs. RBI is discussing pilots of the digital rupee with the four state-owned banks, service providers and fintechs.