How e-rupi will work

How e-rupi will work

Subject :Economy

Context:

The Reserve Bank of India (RBI)   launched the Central Bank Digital Currency (CBDC) — digital rupee or e-rupee (e₹).

• CBDC is a legal tender issued by the RBI in digital form.
• It is the same as the fiat currency- is exchangeable one-to-one with the fiat currency except it is not paper (or polymer) like physical cash.
• It is a fungible legal tender, for which holders need not have a bank account.
• CBDC will appear as ‘liability’ (currency in circulation) on the RBI’s balance sheet.
• The e-rupee is in the form of a digital token representing a claim on the central bank, and will effectively function as the digital equivalent of a banknote that can be transferred electronically from one holder to another.
• A token CBDC is a “bearer-instrument” like a banknote, meaning whoever ‘holds’ the tokens at a given point in time will be presumed to own them.
• E-rupees will be issued in the same denominations as paper currency and coins, and will be distributed through the intermediaries, that is banks.

How is RBI introducing the CBDC?

• The pilot launched  will initially cover four cities — Mumbai, New Delhi, Bengaluru and Bhubaneswar. It will later be extended to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.
  • RBI issued ₹2 crore to four banks.
• Select customers from the selected cities will get CBDC wallets with notes printed digitally with the RBI Governor’s signature.
  • The banks selected a closed user group of 50,000 customers and merchants for these transactions who had to download a digital rupee QR for doing transactions.
• Transactions will be through a digital wallet offered by the participating banks, and stored on mobile phones and devices.
  • Banks sent SMSes to select customers with Android Play Store links to download separate bank-specific CBDC apps for transactions.
  • Customers using debit card details created an e-wallet through the app.
  • Customers then  loaded the wallet with money, which was transferred in the form of tokens from their bank accounts.
  • This money was used to transact with merchants or persons with a similar wallet.
    • Transactions can be both person to person (P2P) and person to merchant (P2M). For P2M transactions (such as shopping), there will be QR codes at the merchant location.
  • At the end of the day, this money can be redeemed back to the bank account
• Eight banks will participate in the pilot — the State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in the first phase in the first four cities, and subsequently, Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank.

How is this different from other wallets?

• UPI-based apps like Google Pay and Paytm have a daily and per-transaction spending limit while the RBI has not fixed any limit on holding digital rupees in wallets.
• Digital rupee transactions above Rs 2 lakh are likely to be reported for tax matters.

What are the types of e-rupee?

• Retail e-rupee -is an electronic version of cash primarily meant for retail transactions, which can potentially be used by almost everyone, and can provide access to safe money for payment and settlements.
• Wholesale CBDC– is designed for restricted access to select financial institutions.
  • It aims to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment and inter-bank market, and make the capital market more efficient and secure in terms of operational costs, use of collateral, and liquidity management.

How is CBDC different from cryptocurrency?

• It is backed by the RBI while private virtual currencies like Bitcoin are not backed by any commodities or Central Banks and have no intrinsic value.
• Private currencies do not represent any person’s debt or liabilities and have no issuer. 
• The inherent design of cryptocurrencies is more geared to bypass the established and regulated intermediation and control arrangements that can lead to instability of the monetary and financial ecosystem.

What are the benefits of e-rupee?

• Reduced dependency on cash
• Higher seigniorage due to lower transaction costs
• Reduced settlement risk-When CBDC is transacted instead of bank balances, the need for interbank settlement disappears.
• Cost of printing, transporting, storing and distributing currency can be reduced
• Real-time and cost-effective globalization of payment systems.

Will CBDC work in offline mode?

• There is no indication yet from the RBI that the e-rupee will function in the offline mode.
• While offline functionality will allow CBDC transactions in regions with poor or no Internet connectivity and create digital footprints of the unbanked population in the financial system.
• The risk of ‘double-spending’ exists in offline mode — because it will be technically possible to use a CBDC unit more than once without updating the common ledger of CBDC.

Is it vulnerable to cyber-attacks?

CBDC ecosystems may be at similar risk for cyber-attacks as existing payment systems.