What is Digital Rupee / e-Rupee / CBDC

Digital Rupee is the new buzzword in town. Let us understand what it is, and how it is likely to impact the way you transact in future.

What is e-rupee (digital rupee)?

E-rupee or digital rupee is a digital version of the Indian rupee. The RBI has proposed to issue two versions of digital rupee - wholesale for interbank settlement and retail for the public. You will hold the digital rupee in a wallet with a bank or service provider. This is also known as Central Bank Digital Currency (CBDC).

The dire need for digital currency?

The e-rupee will cut the cost of cash management for the country, with the bill for producing physical currency hitting 50 billion rupees in the 2022 fiscal year.

Is it a cryptocurrency?

The underlying technology of cryptocurrency (distributed ledger) will underpin parts of the digital rupee system, but the RBI has not decided on this, yet. However, cryptocurrencies like bitcoin or Ethereum are ‘private’ in nature. Digital rupee on the other hand, will be issued and controlled by the RBI, and will therefore have a sovereign guarantee. It appears as a liability on RBI’s balance sheet, and not of a commercial bank.

Can you mine it?

No. RBI will issue it. It cannot be mined like bitcoin. This means that the environmental and energy use concerns associated with bitcoin are unlikely to affect the digital rupee.

Is e-rupee convertible?

The e-rupee will be freely convertible against commercial bank money and cash.

Who will issue it?

RBI has proposed a model where it (the RBI) issues the e-rupee, but commercial banks distribute it.

How do you transfer e-rupee?

The retail version of the digital rupee is token based. Broadly this means, you find out the recipient’s public key (think of it like an email address) and transfer money to them using your private key (essentially, a password).

Will it earn interest?

According to the RBI concept note, no. They are not in favor of e-rupee with interest. Why? Because people might withdraw money from banks and convert it to digital rupee - causing banks to fail. The idea is to let the banks and e-rupee work together.

In the case of large-scale adoption of the e-rupee, there could be a challenge that more low-cost deposits move out from banks to the digital form, causing banks to become inefficient in their operations.

Can e-rupee be traced, or will it be anonymous?

A bank transfer goes from an identified person to another. A cash transfer on the other hand is anonymous - you don’t know who all held that particular rupee notes in the past. For e-rupee, the RBI concept note has proposed partial anonymity where small amounts can be anonymous but not large amounts.

Traceability of e-rupee transactions could become a deterrent to its uptake in India where cash transactions are still hugely popular, largely because of their anonymity. The volume of bank notes in circulation rose 5% on the year in fiscal 2022, underscoring their enduring popularity, with the high-denomination 500-rupee bill accounting for 35% of the total volume.

Why should you hold it?

Convenience. Transacting in e-rupee can take away the inconvenience of carrying around physical notes and coins. Moreover, you would not need to be associated with any bank or even have a bank account to transfer e-rupees. Apart from this, the RBI has outlined some benefits for the country as a whole, such as financial inclusion, innovation and lowering the costs of cash transactions.

Can it be programmed?

Yes, possibly. It can be programmed to achieve purposes like ensuring it is only spent for a particular sector (say, agriculture). Alternatively, it can be given a limited life, like a voucher, allowing RBI to stimulate demand when needed and withdraw it when not needed. These features come with trade-offs and hence RBI has not finalised on them yet.

Can it work in offline mode?

The RBI has proposed offline functionality for the digital rupee - meaning you can transact without the internet. This is expected to help in distributing financial aid and subsidies to millions of Indians living in remote areas. Just to put things in perspective, only 825 million of India's 1.4 billion people have internet access. 

Possible approaches include letting users download e-rupees to a dedicated wallet on a phone. Currencies could then be shifted from one phone to another using Bluetooth and other near-field communication technologies.

However, this can cause duplication where the same rupee transferred to multiple people. The RBI may issue limits for offline transactions to reduce such synchronization issues or look for some technological solution to them.

Summary

The Digital Rupee has given rise to several advantages pertaining to payments – one can make final settlements by paying directly without landing into a settlement risk. Thus, there will be no need for the interbank statement. It can also be compared to a UPI system where payments are absolute in nature. This makes global transactions much easier, since the transaction is complete instantly and needs no confirmation by federal banks.

Regards

Manoj Arora
Official Website