E-Rupee yet to take off

E-Rupee yet to take off

Subject : Economy

Section: Monetary Policy

What is E-Rupee (e-Re) is the central bank digital currency (CBDC) launched by the RBI. While based on block-chain technology, it is not a cryptocurrency.

• The term central bank digital currency (CBDC) refers to the virtual form of a fiat currency.
• A CBDC is an electronic record or digital token of a country’s official currency.
• As such, it is issued and regulated by the nation’s monetary authority or central bank. As such, they are backed by the full faith and credit of the issuing government.
• CBDCs can simplify the implementation of monetary and fiscal policy and promote financial inclusion in an economy by bringing the unbanked into the financial system.
• Because they are a centralized form of currency, they may erode the privacy of citizens.
• Although they aren’t formally being used, many countries are exploring the introduction and use of CBDCs in their economy.

Key Points:

• Pilot was launched in 4 cities four cities—Mumbai, New Delhi, Bengaluru, and Bhubaneswar.
• Presently 4 banks – SBI, ICICI Bank, IDFC First Bank and YES Bank – are involved in the first phase of the pilot
• Four more banks – HDFC Bank, Bank of Baroda, Union Bank and Kotak Mahindra Bank will subsequently be added to the plan, which would cover 13 cities in a phased manner.
• At present only Rs. 5.7 crore is in circulation as CBDC-Retail and Rs. 10.69 crore for CBDC-Wholesale
• CBDC-Retail can only be used for peer-to-peer account transfer, but CBDC -Wholesale is more versatile and can be used for inter-bank transfers as well as international transfers.

Aim:

• It is Government’s answer to cryptocurrency, which has been denied a legal status in India so far.
• e-Re is also targeted at those who don’t have a bank account, but can use digital currencies similar to a pre-paid mobile recharge card.
• e-RUPI is trying to attain a leak-proof way of passing on government subsidies.
• Other objectives are to promoting financial inclusion, enhancing payment system efficiency, competition, security, resiliency, and cross-border payments

Features:

• Available in exact denominations of physical cash
• The E-Re will not earn interest when parked in the e-wallet.
• No intermediary, direct peer-to-peer transfer.
• Instant completion of transaction, no back-end settlement needed.

How different from UPI:

• UPI requires a request from your bank to transfer an amount from your account. For E-Re one can simply transfer digital money from one wallet to another.
• UPI works on a settlement basis between two banks, and it takes about a day for inter-bank settlements to conclude. Thus there is a settlement risk in UPI, since there is an intermediary involved. But in e-Re, there is no settlement risk, since it is issued by the RBI and could also be much faster.
• As UPI is a bank-to-bank payment mode, there is a transaction or audit trail it leaves, which e-Re won’t because it is wallet-to-wallet transfer. RBI is likely to allow anonymity in e-Re transactions, at least in the small-ticket ones.
• Customers are unlikely to be charged anything for using e-Re since usage of cash does not involve any charges. UPI is free now, but could become chargeable in future.
• Multiple factors that contributed to the growth of UPI such as the interoperability of QR code, zero charge, and first mover advantage may limit adoption of E-Re by retail users.