India’s apex bank and financial regulator, the Reserve Bank of India, has kickstarted the pilot launch of India’s ambitious move into the world of blockchain-enabled CBDC (Central Bank Digital Currency).
To make India’s CBDC pilot program a reality, RBI has identified nine banks that will work on this pilot. They are as follows:
- State Bank of India
- Bank of Baroda
- Union Bank of India
- HDFC Bank
- ICICI Bank
- Kotak Mahindra Bank
- Yes Bank
- IDFC First Bank
- HSBC
What is CBDC?
CBDC is simply the digital version of a country’s fiat currency, which uses blockchain technology to process transactions. It serves both as a medium of exchange and a store of value.
According to the RBI, “CBDC is the legal tender issued by a central bank in a digital form. It is the same as a sovereign currency and is exchangeable one-to-one at par (1:1) with the fiat currency.”
A survey of CBDCs done in 2021 said, 90% of central banks in the world are engaged in some form of CBDC work.
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In its union budget, the Government of India announced the launch of the Digital Rupee from FY 2022-23 onwards. With this, India has become one of the few countries in the world to roll out its own digital currency.
In her budget announcement, the Finance Minister said that the introduction of CBDC will give a big boost to India’s digital economy.
What are the features of CBDC?
- CBDC is a sovereign currency issued by the central bank of a country. It has to be in alignment with their monetary policy
- It appears as a liability on the central bank’s balance sheet
- It must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
- It is freely convertible against commercial bank money and cash
- It is a fungible legal tender for which holders need not have a bank account
- It is expected to lower the cost of issuance of money and transactions
What are the benefits of CBDC or digital currency?
The Indian government hopes that the introduction of digital currency will lead to a more efficient and budget-friendly way to manage the currency.
Here are a few benefits of Digital Rupee that RBI noted in its report:
- Less dependence on cash
- Fall in currency management cost
- Lower settlement risk
- Improved cross-border payments
In addition to these, RBI said India’s CBDC will enable businesses to create new products and services. Digital Rupee will be able to utilise UPI and digital wallets like Paytm, the regulator said.
What are the use cases of CBDC or Digital Rupee?
India’s CBDC is known as Digital Rupee and will be represented by this symbol: e₹.
According to the RBI, Digital Rupee will have two use cases:
- Wholesale segment (e₹-W)
India’s Digital Rupee will start its operations with the wholesale segment. RBI said e₹-W is expected to make the inter-bank market more efficient, and help in the settlement of secondary market transactions in government securities.
“Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. Going forward, other wholesale transactions and cross-border payments will be the focus of future pilots, based on the learnings from this pilot,” RBI said in a press statement.
- Retail segment (e₹-R)
The retail segment of CBDC will take about a month to get started. RBI said the retail segment (e₹-R) is planned for launch in select locations. Its usage will be tested under closed user groups, which will include customers and merchants.
RBI will soon come up with the details regarding when and how e₹-R will be operational.
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Conclusion
While it is yet to be seen how the Digital Rupee is going to shape India’s digital payment ecosystem, one can confidently say that the country has embarked on this journey with meticulous planning.
In the coming years, India will see a more evolved digital payment infrastructure.
