The concept of money has undergone a transformation, progressing from being based on commodities to metallic currency, then to paper currency, and finally to digital currency. A currency is a type of money that is solely issued by a government or its central bank. It represents a liability of the issuing central bank (or government) and an asset held by the general public.
The Reserve Bank of India defines Central Bank Digital Currencies (CBDC) or digital currency as the legal tender issued by a central bank in digital form. Digital currency is similar to a government-issued paper currency but in a different form, it can be exchanged at par with the existing currency, and is recognised as a valid means of payment and a secure method of storing value.
Why is the RBI issuing digital rupee (e-₹)?
As per the RBI’s concept note on CBDC, some of the important objectives for issuing digital rupee in India are:
Reducing cost associated with physical cash management: The cost of managing physical cash in India remains substantial. The cost of security printing during the financial year 2021-22 was around 5,000 crores. The issuance of CBDC impacts the value of the money issuing function in terms of reducing operational expenses, such as those linked to the printing, storage, transportation, and replacement of banknotes, as well as expenses connected to reconciliation and settlement delays. While setting up the creation and issuance of a CBDC may involve significant initial infrastructure costs, subsequent marginal operating costs are likely to be very low.
Increase digitisation and achieve a less cash economy: Despite the rapid digitisation of payment methods in India, the country has a unique situation where the amount of cash in circulation has increased. The increased adoption of electronic payment methods has not yet led to a decrease in the demand for physical cash. In the fiscal year 2021-22, there was a greater than usual rise in the amount of banknotes being used, mainly because people held on to cash as a precaution during the second wave of the COVID-19 pandemic. In situations such as the COVID-19 pandemic, e-₹ can be a more desirable way to hold central bank money compared to cash.
Provide an alternative to cryptocurrency: The widespread adoption of cryptocurrencies can present notable risks regarding Money Laundering & Financing of Terrorism. In addition, the unrestricted use of cryptocurrencies can jeopardise the goals of monetary policy as it could result in the emergence of an alternative economy and potentially undermine the effectiveness and stability of the domestic currency. It may also hinder the enforcement of foreign exchange regulations, particularly the evasion of capital flow controls. In addition, the development of CBDCs could address the need for a secure virtual currency that offers benefits without the risks associated with private virtual currencies, thereby providing a risk-free alternative to the public. This could satisfy the demand for a secure digital currency while also protecting the public from the excessive volatility that some of these virtual assets exhibit.
The offline functionality of CBDC would provide advantages in areas that are geographically isolated, as well as offering benefits related to availability and resilience in situations where there is no access to electrical power or mobile networks.
Considering the above advantages, the RBI has decided to issue e-₹ and is currently in the pilot testing phase.
How to get e-₹?
The Reserve Bank of India is responsible for issuing the digital rupee, which will be distributed by banks similar to the current physical currency management system. Presently, the State Bank of India (SBI), ICICI Bank, YES Bank, and IDFC First Bank are conducting a pilot launch of the retail e-₹ in four cities - Mumbai, New Delhi, Bengaluru, and Bhubaneswar. During the pilot testing phase, the e-₹ is being tested in specific locations among a closed user group (CUG) consisting of participating merchants and customers. The e-₹ would be in the form of digital token and would be issued in the same denominations as physical paper currency and coins that are currently in circulation. You can sign up for an e-₹ wallet offered by any of the above banks. The e-Rupee wallet requires registration before use, and it will function similarly to a traditional physical wallet, but in digital form on a phone. After completing the registration process, you can add funds to the wallet, which is a straightforward and instantaneous procedure. Typically, banks provide two methods for adding money to the wallet: a) from a bank-linked account, or b) via various UPI applications. The digital wallet will hold currency in the form of tokens, with the back-end technology being a centralised platform based on blockchain technology that the RBI has developed and provided to banks. This platform is used to store and transfer digital currency among different customer wallets.
How to use e-₹?
It is possible to perform both Person to Person (P2P) and Person to Merchant (P2M) transactions with e-₹. Payment to merchants can be made by scanning the QR codes displayed at their premises. The transfer of e-₹ happens from one wallet to another and therefore does not require a bank account. A bank account would be required to load money into the wallet or withdraw the money from the wallet. However, the receiver of e-₹ does not require to have a bank account. This differentiates e-₹ from online payment options like UPI/NEFT/RTGS.
Difference between e-₹ and UPI?
In terms of functionality, both e-₹ and UPI allow for real-time digital money transfers, with no significant differences for users. However, the back-end operations of e-₹ and UPI differ considerably from one another. Refer to the picture for the process flow of a UPI payment transaction. Whereas e-₹ transaction will involve transfer of e-₹ from one wallet to another, just like cash payment.
Limitations of e-₹
Currently the major limitation of e-₹ is that it cannot be converted to cash. Further, since e-₹ is cash in digital form, it does not earn any interest. However, money in your bank account earns interest. As e-₹ is still in its early stages, it may not be accepted at a large number of stores. These are major limitations that may hinder the widespread acceptance of e-₹.
Conclusion
As a form of government-issued currency, e-₹ or CBDC possesses distinct advantages such as trust, safety, liquidity, settlement finality, and integrity that are unique to central bank money. The implementation of e-₹ offers the potential to deliver substantial advantages, including decreased reliance on physical cash, greater seigniorage through lower transaction expenses, and reduced settlement risks. The introduction of e-₹ has the potential to produce a more durable, streamlined, reliable, regulated, and legally sanctioned payment alternative. However, to gain wider acceptance among the general public, the e-₹ must undergo significant advancements and address the various concerns mentioned earlier.
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