RBI Launched Retail Central Bank Digital Currency (CBDC) on Pilot Basis

Relevance of Retail Central Bank Digital Currency (CBDC) for UPSC

Retail Central Bank Digital Currency (CBDC): Yesterday, RBI Launched first ever Retail Central Bank Digital Currency (CBDC) on Pilot Basis & with this, India will enter the league of countries that have introduced Central Bank Digital Currency (CBDC). So, CBDC and related issues are important for UPSC CSE. RBI’s Retail Central Bank Digital Currency (CBDC) launch covers:

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Why RBI’s Retail CBDC in news?

Under RBI’s Retail Digital Rupee Pilot Project that started on December 1, four banks have created a wallet in their mobile banking applications where CBDCs will be available to select customers.

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Background of Central Bank Digital Currency (CBDC)

• Government of India announced the launch of the Digital Rupee — a Central Bank Digital Currency (CBDC) from FY 2022-23 onwards in the Union Budget placed in the Parliament on February 01, 2022.
• In the budget announcement it was stated that the introduction of CBDC will give a big boost to the digital economy.

Key features of RBI’s Retail Digital Rupee Pilot Project

• The central bank has identified eight banks for phase-wise participation in RBI’s Retail Digital Rupee Pilot Project.
• Only those digital wallets offered by banks participating in the RBI’s digital rupee programme can transact in digital currency.
• The retail digital rupee will be in the form of a digital token that represents legal tender.
• The RBI will issue digital currency in the same denominations that paper currency and coins are issued.
• Retail digital rupee transactions can be carried out through a digital wallet on mobile phones and other devices.
• The retail digital currency will be distributed through banks. Transactions in digital currency can be carried out between person-to-person (P2P) and person-to-merchant (P2M).
• Payments to merchants can be made using QR (Quick Response) codes displayed at merchant locations.
• Why it is called Pilot project?
  • Because, only eight banks have been identified for phase-wise participation in this pilot.
  • The first phase will begin with four banks, viz., State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities across the country.
  • Four more banks, viz., Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank will join this pilot subsequently.
  • The pilot would initially cover four cities, viz., Mumbai, New Delhi, Bengaluru and Bhubaneswar and later extend to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla.
  • The scope of pilot may be expanded gradually to include more banks, users and locations as needed.

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What is CBDC?

• The Central Bank Digital Currency is a legal tender issued in digital form by a central bank of a country.
• It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender, and a safe store of value.
• CBDCs would appear as a liability on a central bank’s balance sheet.
• As per RBI, CBDC is a “fungible legal tender” for which holders do not require to have a bank account.
• CBDCs around the world:
  • At least 100 countries are exploring centralized digital currencies on some level or other.
  • While some are researching, others have introduced digital currency on a pilot basis or officially launched it for the public.

How will RBI’s Retail CBDC be a game changer?

• The retail digital Rupee or e₹-R is a virtual token that represents legal tender. It would be available in the same denominations in which paper currency and coins are issued.
• While wholesale CBDC, i.e., e₹-W, is for select financial institutions to use for interbank transfers, retail CBDC, i.e., e₹-R is for businesses and individuals for use in peer-to-peer (P2P) and person-to-merchant (P2M) payments.
• Retail CBDC will be a game changer. While the Unified Payments Interface (UPI) provides the features of fund transfer, this can become 100X bigger since it replaces cash transactions with digital currency directly issued by the RBI.

Digital Rupee vs Cryptocurrency

• The digital Rupee is different from traditional cryptocurrency. This is also known as Central Bank Digital Currency (CBDC) meaning it has the back of a central bank, in this case the RBI.
• The main characteristic of a cryptocurrency is that it is decentralised, whereas the digital Rupee is issued and controlled by RBI and it’s the central bank that decides all the parameters for the CBDC.
• Unlike a cryptocurrency, where, the value fluctuates based on the transactional volume, digital Rupee will have a fixed value and is also considered a legal tender in India.
• Hence, the digital Rupee can be used for making person-to-person (p-to-p) and person-to-merchant (p-to-m) transactions.

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Why CBDCs are more preferred over Cryptocurrency?

• Cryptocurrencies pose risks to consumers and do not have any sovereign guarantee and hence are not legal tender.
• Their speculative nature also makes them highly volatile.
• A user loses access to their cryptocurrency if they lose their private.
• In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
• Cryptocurrencies are more vulnerable to criminal activity and money laundering as they provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.
• A central bank cannot regulate the supply of cryptocurrencies in the economy which could pose a risk to the financial stability of the country if their use becomes widespread.
• Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security. For example, the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland.

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FAQs

Q. What is CBDC?

Ans. The Central Bank Digital Currency is a legal tender issued in digital form by a central bank of a country.
It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender, and a safe store of value.

Q.  When did RBI’s Retail Digital Rupee Pilot Project start?

Ans. RBI’s Retail Digital Rupee Pilot Project started on December 1. The first phase will begin with four banks, viz., State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities across the country.

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