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Context: Recently, Reserve Bank of India (RBI) has announced the launch of India’s much-awaited Central Bank Digital Currency (CBDC), a sort of official cryptocurrency, for retail users.
The pilot will initially cover the four cities of Mumbai, New Delhi, Bengaluru, and Bhubaneswar, where customers and merchants will be able to use the digital rupee "e-rupee". Four banks will be involved in the controlled launch of the digital currency in these four cities: State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank.
The pilot will work in a closed user group (CUG) comprising participating customers and merchants. Select customers from the selected cities will get CBDC wallets with notes printed digitally with the RBI Governor’s signature.
CBDC is a legal tender issued by the RBI in digital form. It is the same as the fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different — 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 also appear as ‘liability’ (currency in circulation) on the RBI’s balance sheet.
Based on usage and the functions performed by the digital rupee, and considering different levels of accessibility, the RBI has demarcated the digital rupee into retail and wholesale categories.
Retail e-rupee: It 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: It is designed for restricted access to select financial institutions. It has the potential 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.
E-rupees will be issued in the same denominations as paper currency and coins and will be distributed through the intermediaries, that is banks. Transactions will be through a digital wallet offered by the participating banks, and stored on mobile phones and devices.
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.
A user will be able to withdraw digital tokens from banks in the same way s/he can currently withdraw physical cash. S/he will be able to keep his/her digital tokens in the wallet and spend them online or in person or transfer them via an app.
Not very different in terms of how it will be used. However, UPI-based apps like Google Pay and Paytm have a daily and per-transaction spending limit. 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.
It has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk.
It would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.
It is likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation.
It CBDCs would also potentially enable a more real-time and cost-effective globalization of payment systems.
The wider adoption of CBDC may also mean that the monetary policies have to be formed in a way to inject more liquidity in the system than needed to plug currency leakage from the banking system.
According to the RBI deputy Governor, since CBDC is a currency that does not pay interest, its impact on bank deposits may “actually” be limited.
CBDC as a “legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.”
Where as “Private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value; some claims that they are akin to gold clearly seem opportunistic.”
CBDC is different from cryptocurrencies and stable coins which are issued by private entities. Unlike CBDCs which will be a liability of the central bank, cryptocurrencies are no one’s liability and their value is derived from the expectation that they will be valued and used by other.
By: Shubham Tiwari ProfileResourcesReport error
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