Explaining the features and purpose of India’s very own digital currency, the Reserve Bank of India (RBI) on October 7, 2022 released a concept note on Central Bank Digital Currency (CBDC). RBI will soon start the pilot launch of the digital rupee for specific use cases. The concept note explains the objectives, choices, benefits, and risks of issuing a Central Bank Digital Currency in India.

What is a digital rupee?
The Central Bank Digital Currency or digital rupee can be defined as the legal tender issued by the Reserve Bank of India, according to the concept note. The digital rupee is the same as a sovereign currency and is exchangeable one-to-one at par with the fiat currency, RBI mentioned.

How is digital rupee different from money in digital form?
Explaining the difference between CBDC and money in digital form, RBI said, “A CBDC would differ from existing digital money available to the public because a CBDC would be a liability of the Reserve Bank, and not of a commercial bank.”

Features of digital rupee
1) CBDC is a sovereign currency issued by central banks in alignment with their monetary policy.

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

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

agencies

4) Freely convertible against commercial bank money and cash

5) Fungible legal tender for which holders need not have a bank account

6) Expected to lower the cost of issuance of money and transactions


Types of CBDC that can be introduced

The Central Bank Digital Currency can be classified into two broad types — general purpose or retail (CBDC-R) and wholesale (CBDC-W). Retail CBDC would be potentially available for use by all such as the private sector, non-financial consumers, and businesses. Wholesale CBDC is designed for restricted access to select financial institutions.

While wholesale CBDC is intended for the settlement of interbank transfers and related wholesale transactions, retail CBDC is an electronic version of cash primarily meant for retail transactions.

“It is believed that retail CBDC can provide access to safe money for payment and settlement as it is a direct liability of the central bank. Wholesale CBDC has the potential to transform settlement systems for financial transactions and make them more efficient and secure. Going by the potential offered by each of them, there may be merit in introducing both CBDC-W and CBDC-R,” RBI said in the concept note.

Why is RBI introducing CBDC?

RBI believes that the digital rupee system will “bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient.”

Pointing out the motivations for India to consider issuing CBDC, RBI mentioned these reasons

a) Reduction in cost associated with physical cash management

b) To further the cause of digitisation to achieve a less cash economy.

c) Supporting competition, efficiency, and innovation in payments

d) To explore the use of CBDC for improvement in cross-border transactions

e) Support financial inclusion

f) Safeguard the trust of the common man in the national currency vis-à-vis proliferation of crypto assets

Digital rupee vs cryptocurrency

RBI also expressed concern about the popularity of cryptocurrency in recent years. “The proliferation of crypto assets can pose significant risks related to money laundering and financing of terrorism. Further, the unabated use of crypto assets can be a threat to the monetary policy objectives as it may lead to the creation of a parallel economy and will likely undermine the monetary policy transmission and stability of the domestic currency. It will also adversely affect the enforcement of foreign exchange regulations, especially, the circumvention of capital flow measures,” it said.

“Further, developing CBDC could provide the public with a risk-free virtual currency that will provide them with legitimate benefits without the risks of dealing in private virtual currencies. It may, therefore, fulfill the demand for secured digital currency besides protecting the public from the abnormal level of volatility that some of these virtual digital assets experience. Thus, safeguarding the trust of the common man in the Indian Rupee vis-à-vis proliferation of crypto assets is another important motivation for introducing CBDC,” the regulator further mentioned.