By Mohammad Sikander

Reserve Banak of India (RBI) took a historical step on 1st December, 2022 by launching a Digital Currency, named as e-Rupee (e₹). Technically it is a Central Bank Digital Currency (CBDC). RBI has claimed this will affect the financial ecosystem that will transform the way of doing business and money transfer. It is noteworthy that this important decision was taken by RBI close to G-20 submit, where cryptocurrencies and ease of cross-border payments were important concerns. To promote the awareness about CBDC or e-Rupee, its approach and possible uses, Fin-tech department of RBI released a detailed Concept Note in October 2022.

RBI expressed several times its concern about the cryptocurrencies to the public, reiterating how these do not have underline-value and are not in legal framework. In fact, the Government of India announced the launch of Digital Rupee in Financial Year 2022-23 in the Union Budget placed in the Parliament in February 2022. In that budget announcement it was stated that introduction of CBDC will give big boost to the digital economy.

Contrary to the cryptocurrencies, RBI claims that the CBDC has advantage of being a sovereign currency, holds unique advantages of money issued by the Reserve Bank of India, trust and safety; and is fully centralised and surrounded by the legal framework. This move of RBI is an innovation in payment system, adding efficiency to the payment settlement system, boosting innovation in cross-border payments and providing the public with uses that any private virtual currencies can provide, without any associated risk.

The digital currency issued by the RBI is in the same denominations as paper money and coin (Rs 5 – 10 – 20 – 100 – 200 – 500 – 2000) and the user can have transactions with a digital wallet on mobile phone and other devices similar to other wallet apps like PhonePe, G-pay, Paytm and others. Digital currency transaction can only be made through the digital wallets provided by participating banks in the RBI’s digital rupee scheme. 

The design and features of e-Rupee (e₹) is in line with that of physical currency as it is an electronic form of the present currency and in accordance with the specific functions of e-Rupee (e₹) to be performed. The Concept Note of CBDC classified e-Rupee (e₹) into two types of CBDC viz CBDC-R and CBDC-W. The former is oriented towards retail transaction, which everyone can use for general and retail transaction. While CBDC-W is wholesale oriented meant for use by selected financial institutions intended for the interbank settlement of transfers.

Total currency issued by the RBI is kept by three stakeholders: RBI; Commercial banks; and general public. e-Rupee (e₹) is akin to paper currency but it is issued in digital form, convertible at par with the existing currency and it shall be acceptable by everyone. Quantum of currency issued digitally shall not be printed. However, these would form liability of the RBI in its balance sheet which will be payable to public on demand. Banknote and CBDC are just two different types of liabilities of RBI, so the effect will come only on the composition but not on size of currencies.

It has been launched by the RBI on a pilot mode for a limited use as digital alternative of cash. It is similar to the physical cash that anyone holds in wallet except that e-Rupee (e₹) is held electronically in a digital wallet, overseen by the RBI. During the pilot mode, the ability to excite the interest of general public and corporates and business entities in e-Rupee (e₹) shall be a major concern.

Unlike saving accounts with banks which yield interest, e-Rupee (e₹) shall be non-remunerated currency and shall bear no interest. It is likely to affect the attractiveness at large in retail sector. Use of e-Rupee (e₹) would also seem to be limited to digital transactions and it may face tough competitions from UPI, an instant real time consumer payment system that allowed its user to transfer money between banks without disclosing their bank accounts. RBI may have to attach other features to make its CBDC relatively preferable.

e-Rupee (e₹) holding will diminish the quantum of cash held by commercial banks and may affect adversely their loan payment capabilities. Obviously, capacity to create loans depends upon the amount of cash held by banks in their vaults.

The G-20 has made enhancing cross-border payment a priority and endorsed a comprehensive programme to address the key changes therein, namely high cost, low speed, limited access and insufficient transparency and frictions that contributed to the challenges. Faster, cheaper, more transparent and more inclusive cross-border payment services are expected to deliver widespread benefits for citizens and economy worldwide that support economic growth, international trade and financial inclusion.

It is interesting to note why CBDC would not earn interest in savings accounts. It is akin to cash holding privately, i.e., not deposited in banks. Obviously, anybody having physical cash would not get any intertest thereon. The question of interest would arise only when physical cash is deposited in saving accounts with banks. But there is a question of safety involved in keeping cash physically. CBDC would come in with great rescue here. It is like physical cash in all transactions, while it would be safe with the monetary ecosystem of the nation.

The prima facie benefit to the central banks, RBI in our case, is that no cash will have to be printed for the portion of liquidity issued electronically. The cost of printing, carrying with the banking system, distribution and reprinting in lieu of soiled notes deposited back to the system will be saved. 

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