BackExplained: What is Digital Rupee? RBI launches first pilot project today
Digital Rupee: The RBI has been exploring the pros and cons of a central bank digital currency for some time
PremiumIndia's first Digital Rupee pilot project will commence today. The Reserve Bank of India (RBI) will launch the pilot for a central-bank-backed digital rupee for the wholesale segment today, November 1. "...the first pilot in the Digital Rupee - Wholesale segment shall commence on November 1, 2022," the RBI said in a statement on 'Operationalisation of Central Bank Digital Currency-Wholesale (e ₹-W) Pilot'.
It also announced that the first pilot in Digital Rupee - Retail segment is planned for launch within a month in select locations in closed user groups comprising customers and merchants.
9 banks identified for participation in digital rupee’s wholesale pilot
The nine banks are State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC, the RBI said in a release.
What is Digital Rupee?
A Central Bank Digital Currency (CBDC) or Digital Rupee is a digital form of currency notes issued by a central bank. Digital currency or rupee is an electronic form of money, that can be used in contactless transactions. Presenting Union Budget 2022, Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) would be rolling out its digital currency soon.
CBDC can be classified into two types
1) Retail (CBDC-R): Retail CBDC would be potentially available for use by all
2) Wholesale (CBDC-W) is designed for restricted access to select financial institutions.
Difference between digital rupee and cryptocurrency
A cryptocurrency is a decentralised digital asset and a medium of exchange based on blockchain technology. However, it has primarily been controversial due to its decentralised nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities. On the Contrary, Central Bank Digital Currency (CBDC) issued by the Reserve Bank of India (RBI) will be a legal tender in a digital form.
“The digital rupee will be different from Bitcoin, Ethereum and other cryptocurrencies in the sense it will be backed by the government. Secondly, having an intrinsic value on account of government backing, the digital rupee will be equivalent to holding a physical rupee equivalent," said Manoj Dalmia, Founder and Director, Proassetz Exchange.
Benefits of Digital Rupee
Apart from reducing the transaction cost, having a digitised currency will make it easier for governments to access all transactions happening within the authorized networks. “It will become impossible to avoid the gaze of the government, thus subjecting every transaction to relevant laws within the country. Hence, the government will have better control over how money leaves and enters the country, which would allow them to create a space for better budgeting and economic plans for the future, and overall a much safer environment," said Archit Gupta.
Another benefit of digital currency is that they do not get torn, burnt or physically damaged. Neither can they be physically lost. “The lifeline of a digital currency will be indefinite compared to physical notes," he added.
Mr. Debraj Dutta,Sr. Business Development Manager, Montran India said "The launch of CBDC has been perceived as a commendable step by the Reserve Bank of India to transform the very nature of money and its functions. Digital currency will fuel financial inclusion and bring in resiliency and efficiency to the payments space. CBDC and the central bank’s RTGS will jointly augment the Delivery-Versus-Payment mechanism for secured and guaranteed payment and settlement of funds. CDBC interfacing with RTGS will complement the Central bank's vision of interoperability, transparency, accessibility and financial inclusivity."
The RBI has been exploring the pros and cons of a central bank digital currency for some time and is working towards a strategy to implement it in a phased manner, it said earlier this month.
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