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EconomyWhy RBI is launching digital rupee, how it will work explained

Why RBI is launching digital rupee, how it will work explained

As the Reserve Bank of India (RBI) released a concept note on the country’s proposed central bank digital currency (CBDC) today, which is being touted as the “digital rupee”, questions have arisen about its similarities with and differences from digital money and cryptocurrency. The concept note does explain the key issues such as technology and design choices, possible uses of the digital rupee (e₹) and issuance mechanisms, among other things. 

The RBI will soon begin work on the pilot project.

The Fintech Department, a department created by the RBI to devise a CBDC and formulate regulations related to cryptocurrencies, has prepared the note, which says that the body aims to work step by step for different stages of pilots before the digital currency is finally launched. It also underlines the need to identify “innovative methods and compelling use cases that will make CBDC as attractive as cash if not more.”

Digital rupee: The RBI premise

The proposed design structures a CBDC or digital rupee as a sovereign currency, holding unique advantages of being central bank money that incorporates trust, safety, liquidity, settlement finality and integrity. Simply put, a CBDC is not a cryptocurrency in the strictest sense.

The note discusses further a number of motivations behind the idea of CBDC in India such as reduction in operational costs involved in physical cash management and fostering financial inclusion. 

The digital rupee will appear as a liability on the RBI’s balance sheet.

It must be accepted as a medium of payment, legal tender and a safe store of value by all citizens, companies and government agencies.

The digital rupee is freely convertible against commercial bank money and cash.

The CBDC is a fungible, legal tender for which holders need not have a bank account.

The digital rupee is expected to lower the cost of insurance of money and transactions.

Why RBI felt the need for a digital rupee

Among other things, the launch of the digital rupee aims at bringing resilience, efficiency and innovation to the existing payments system. Further, it is expected to boost innovation in the cross-border payments space.

Most importantly, the note claims that the digital rupee would offer the same services as any private virtual currencies, without the associated risks.

The other reasons are:

  1. Reduction in costs associated with physical cash management
  2. To further the cause of digitisation a achieve an involving less cash
  3. Supporting competition, efficiency and innovations in payments
  4. Exploring the use of the digital rupee for improvement in cross-border transactions
  5. Supporting financial inclusion
  6. Safeguarding the trust of ordinary citizens in the national currency vis-à-vis proliferation of crypto assets

Similarities with and differences from cryptocurrency

The note is critical of the design of cryptocurrencies, which is more geared to bypass the established and regulated intermediation and control arrangements.

The RBI’s proposed digital rupee works on the idea that it will be similar to any private cryptocurrency, minus the risks.

Is a digital rupee like one bitcoin?

No. There will be two types of CBDCs in India – Retail (CBDC-R) and Wholesale (CBDC-W). While the former will cater to the private sector, non-financial consumers and businesses, the latter will cater to select financial institutions.

The RBI is considering both token-based and account-based structures for its CBDC.

Challenges

Dealing with the anonymous nature of cryptocurrency, the note mentiones that it remains a challenge as all digital transactions would leave some trail. However, it would remain a key design decision for the project.

Finally, the underlines the need to create CBDCs that conform to Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) requirements.

Socialist aversion to things private

RBI’s aversion to the presence of a ‘private’ cryptocurrency in the Indian is well known. Like most countries, it also arrived at the conclusion that there is a need to create a CBDC.

However, the central bank’s opposition to ‘private’ cryptocurrencies still remains, as is evident by its frequent calls to ban the class.

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