Digital Rupee | Central bank digital currency of India | What is e-rupee , How it is different from crypto currency?

What Is CBDC or e-rupee ?

The CBDC or e-rupee is the digital avatar of paper currency issued by central banks of a sovereign nation. CBDC will be categorizes as legal tender in a digital form. Commonly known as the digital rupee. By definition, it is freely convertible against the physical currency issued by the same central bank. Similar to physical currency, one need not have a bank account to transact using CBDCs either. The digital rupee is the RBI’s accepted version of cryptocurrencies. However, one major distinguishing factor between CBDCs and physical currency is that CBDCs will have an infinite life, in the sense that it cannot be damaged or lost in any physical form. It will be managed on a digital ledger that may or may not be blockchain-enabled.

Table of Contents

Digital e-rupee of India or CBDC

What is Cryptocurrency?

In simple terms, cryptocurrency is decentralized money, free from any government or central bank’s chains. It relies on blockchain technology and uses cryptography to secure transactions done by people making it impossible to counterfeit.

To better understand cryptocurrency, you must know about the three terminologies: blockchain, decentralization and cryptography.

Blockchain in cryptocurrency is the showrunner. It is a digital ledger whose access is distributed between authorized users and records transactions. The information and access are shared among the registered users. So, anything the blockchain records is transparent and immutable–the information cannot be tampered with or hacked. Not even by the administrator.

Decentralization in cryptocurrency means that the asset is free from governing bodies like central banks. This mechanism makes cryptocurrencies independent. At the same time, the centralized money we use is monitored and managed by the RBI.

Cryptography in cryptocurrency means secret writing, which means the recipient can only read messages. It takes care of the transactions, protects operational autonomy, and fortifies the entire chain.

How Does Cryptocurrency Work?

All cryptocurrencies are generated through a rigorous process called mining. The miners use computers with high-end GPUs to solve various complex mathematical problems and puzzles to get cryptocurrencies as a reward. It takes days and even months to mine crypto.

People can also buy cryptocurrencies from currency owners and exchange platforms, and they can even sell them to other individuals, too. The cryptocurrencies are stored in digital wallets, which are either hot or cold. A hot wallet is connected to the internet. In contrast, cold storage keeps your holdings offline.

Cryptocurrencies can be transacted or transferred using your smartphone – just like a UPI transaction. Users can also convert their crypto holdings to cash using their bank accounts or P2P transactions.

Of course, while Bitcoin remains the popular choice for miners and investors, it did start a digital currency revolution that led to the birth of many popular currencies like Ethereum, Tether, XRP etc.

Cryptocurrencies are immune to any central authority or government interference. However, their relationship with the Indian government has been quite uncomfortable.

The introduction of CBDCs in India raises many important questions. In a country that has wanted to ban the practice of cryptocurrencies, what is to be understood from the central bank’s move? Not to mention, the finance minister (FM) Nirmala Sitharaman, who had earlier asked the public to exercise caution while dealing in cryptocurrency, herself has said that CBDCs will be fully launched in India by 2023. This makes it important to know what CBDCs are, how they are different from cryptocurrencies and UPI transactions, and also about the safety concerns associated with CBDCs.

Types of CBDC

CBDCs can be of two types: retail (CBDC-R) and wholesale (CBDC-W). The wholesale kind would be used for interbank settlements and other wholesale transactions whereas CBDC-R would be used for retail transactions as an electronic form of cash. CBDC-W is expected to reduce transaction costs and make the inter-bank markets more efficient.

Features of CBDC

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

Please read this also what is Hedge-12 bank nifty

Do We Need the Digital Rupee?

The most important reason for launching a digital rupee by the RBI is to push India forward in the virtual currency race. And, of course, due to the growing importance of cryptocurrency. With blockchain technology, the digital rupee will increase efficiency and transparency. Blockchain will also enable real-time tracking and ledger maintenance.

The payment system will be available to wholesale and retail customers 24/7. Indian buyers can pay without a middle man. Lower transaction cost. Real-time account settlements. You don’t have to open a bank account to transact with a digital rupee. Fast cross-border transactions. No risk of volatility, as the RBI, will back it. Compared to currency notes, the digital rupee will be mobile forever. But with a behemoth payment system like UPI around, can CBDCs up the game.

How digital rupee is different from crypto currency?

There is no direct comparison between the CBDC (Central Bank Digital Currency) and cryptocurrency because the digital rupee is not a commodity or virtual asset, contrary to cryptocurrencies. Moreover, crypto coins are not exactly money.”

This digital rupee can be exchanged for cash, equivalent to the banknotes that central banks like the RBI issue in paper form. The RBI will continue to issue the CBDC, which will serve the same function as banknotes but is not a decentralised asset like cryptocurrencies.

What’s the difference between the two?

While both digital currency and crypto currency involve online modes of transaction, there are slight differences between the both. Central Bank Digital Currency (CBDC) refers to the digital form of a country’s fiat economy, while crypto currencies are an alternative form of payment with unique algorithm. The digital currencies can be called the country’s digital fiat and the crypto currencies are digital assets in a decentralized network. On the other hand, while the digital currencies are entirely regulated by the central bank and the government who set value of the currency, crypto currency’s value is independent of central banking authorities and follows a transparent procedure from mining to ownership to transfer of assets.

Launch of e-rupee or Digital Currency of India

The Reserve Bank of India (RBI) has finally launched its pilot programme for the e-rupee, India’s own Central Bank Digital Currency (CBDC). The programme, which commenced from November 1, 2022 will be India’s first tryst with e-currencies. Over the past few years, several central banks around the world have jumped on to the CBDC bandwagon, researching the feasibility of digital currencies, and figuring out the best way to put them to practice. Presently, several other central banks across the world are exploring the possibilities of putting CBDCs into practice. RBI has selected nine banks for participation in the digital rupee’s wholesale pilot project. These 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.

What degree of privacy would apply and who could hold CBDC?

For CBDC to substitute currency as a medium of exchange, it needs to incorporate all the features that physical currency represents – anonymity (that currency transactions can be carried out without maintaining evidence of transacting parties), universality (that currency can be used for any transaction) and finality (that payment of currency unconditionally settles the transaction). Ensuring anonymity for a digital currency particularly represents a challenge, as all digital transactions leave a trail. Clearly, the degree of anonymity would be a key design decision for any CBDC and there has been significant debate on this issue. Most central banks and other observers have, however, noted that the potential for anonymous digital currency to facilitate shadow-economy and illegal transactions, makes it highly unlikely that any CBDC would be designed to fully match the levels of anonymity and privacy currently available with physical cash. An intermediate degree of privacy may be thought of and can also be possible. For example, the European Central Bank (2019) has experimented with the concept of a CBDC with elements of programmable money, by which individuals could be allotted a certain amount of ‘anonymity vouchers’ .

CBDCs Around The World

A study by Atlantic Council Geo Economics Center has found that close to 105 countries are considering the possibility of launching a CBDC that would be primarily used for interbank transactions. With the recent popularity of a cashless or digital financial framework, world governments and central banks are exploring (some of them have also implemented) the possibilities of digital currency.

The Bahamas, Nigeria, Dominica, Montserrat, Antigua and Barbuda, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines have already launched their digital currency. Russia – the Digital Ruble has completed the initial trials–full cycle of transactions as announced by the central bank of Russia. China – plans to launch the eCNY or digital Yuan by 2022.

Bottom Line

By introducing the digital rupee, the RBI expects to address problems associated with existing physical currencies and cross-border transactions. Cross-border money transfer and converting the money into foreign currency is tedious and expensive. With the launch of the digital rupee, the instant cross-border money transfer is set to make bank cash management and operations more seamless.

In India, cash placement and tracking the same is a challenge. CBDC can address anonymity and resolve it in a non-intimidatory way and reduce the demand for cash. The government will save operational, printing, distributing and storing costs–empowering the government’s vision toward a cashless economy.