Home / News / India /  RBI to commence limited pilot launches of the digital rupee, here's how it works

With the Reserve Bank on 8 October confirming the commencement of limited pilot launches of the digital rupee for specific use cases, experts, investors and others are getting busy in trying to calculate the permutations and combinations on the pros and cons of the new move.

Though in the concept note released on Friday, RBI said it aims to create awareness about Central Bank Digital Currency (CBDC) for India in general and the and the planned features of the Digital Rupee (eRs), the Note also seeks to explain Reserve Bank’s approach towards introduction of the CBDC.

The RBI said e- will provide an additional option to the currently available forms of money. "It is substantially not different from banknotes, but being digital it is likely to be easier, faster and cheaper. It also has all the transactional benefits of other forms of digital money," RBI statement said.

The new Concept Note discusses key considerations such as technology and design choices, possible uses of Digital Rupee, issuance mechanisms, etc. It examines the implications of introduction of CBDC on the banking system, monetary policy, financial stability, and analyses privacy issues.

ALSO READ: RBI to soon start pilot project on digital currency for limited use

The features of CBDC include:

• CBDC is sovereign currency issued by Central Banks in alignment with their monetary policy.

• It appears as a liability on the central bank’s balance sheet.

• Must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.

• Freely convertible against commercial bank money and cash

• Fungible legal tender for which holders need not have a bank account.

• Expected to lower the cost of issuance of money and transactions.

Types of CBDC:

As per RBI, CBDC can be demarcated into two broad types viz general purpose (retail) (CBDC-R) and wholesale (CBDC-W).

CBDC-R is potentially available for use by all private sector, non-financial consumers and businesses. While, CBDC-W could be used for improving the efficiency of interbank payments or securities settlement, as seen in Project Jasper (Canada) and Ubin (Singapore).

Also, CBDC–W has the potential to transform the settlement systems for financial transactions undertaken by banks in the G-Sec Segment, Inter-bank market and capital market more efficient and secure in terms of operational costs use of collateral and liquidity Concept Note on CBDC management.

How will this CBDC–W work?

1) CBDC-W could also be explored for Wholesale market for asset classes which are OTC and bilaterally or settled outside CCP arrangements- CPs, CDs, etc.

2) It can be accessed to retail for buying assets such as G-secs, CPs/CDs, primary auctions etc bypassing the bank account route.

3) and In case of g-secs, if assets are also tokenised, this could be extended to non-residents to investment in domestic asset classes.

Policy implication of introduction of CBDC:

It would depend on the following policy decisions:

1) whether CBDC will be non-remunerated or remunerated.

2) whether it would be widely accessible just like physical currency, or limited to wholesale customers such as banks (as in the case of central bank reserves); and

3) whether it will be anonymous like physical currency or ownership will be identifiable, which leaves the trail of different entries.

As per recommendations of the internal Working Group (WG) set up by Reserve Bank in October 2020, RBI is exploring the option of implementation of account-based CBDC in Wholesale segment and token-based CBDC in Retail segment vide a graded approach.

a) Build a prototype as per the recommendations of the WG ands Specify technical requirements to technology partners.

b) Test the idea in an operationally controlled environment to examine its functionality, including the design, deployment plan and success criteria.

c) Perform test cases with both positive and negative scenarios to examine its durability and document the results.

d) Evaluate Test Results and finalise the design of the prototype.

e) Conducting large scale pilots with a diverse and larger user base. Participants of the pilots must include users from different income levels, literacy levels, regions, genders and age groups.

Risks involved:

a) Privacy risk: The wide adoption of CBDC poses the entire ecosystem to enhanced privacy risk as the CBDC provides anonymity and privacy up to a certain extent.

b) Security and technology risks: The technology design of the CBDC will be a determinant of the security risk posed to the users.

c) Accountability Risk: The identification of who is accountable to consumers in case of loss is crucial and a core issue in respect of the consumer protections associated risk.

 

ABOUT THE AUTHOR

Saurav Mukherjee

A business media enthusiast...believe to listen more, than just blabbering like others.
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