RBI Launches First Pilot for Retail Digital Rupee (e₹-R): Here’s All You Should Know

While presenting the Union Budget for FY 2022-23, Finance Minister Ms Nirmala Sitharaman mentioned that RBI, the Indian central bank, will soon launch an Indian digital currency. This was the first official statement from the Union government on the much-anticipated digital currency's launch. Central banks globally have been exploring the possibility of issuing a CBDC. The RBI is trying to make India's CBDC operational in FY 2022-23 and has been debating over various features of the CBDC and private Cryptocurrencies for quite some time now.

Recently, the Reserve Bank of India (RBI), in its press release dated November 29, 2022, announced that the launch of the first pilot for Retail Digital Rupee (e₹-R) would be on December 01, 2022.

What is 'Digital Rupee' or Central Bank Digital Currency (CBDC)?

According to RBI, CBDC is the 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. Unlike cryptocurrencies, the Digital Rupee is issued in the same denominations as paper currency and coins. For instance: 1 digital Rupee is equal to Re 1 cash.

Digital Rupee is a sovereign currency issued by the RBI in alignment with their monetary policy. It appears as a liability on RBI's balance sheet. It must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies. Digital Rupee must be freely convertible against commercial bank money and cash; it is a fungible legal tender for which holders need not have a bank account.

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There are two types of Digital Rupee:

• General purpose or retail (CBDC-R): They are an electronic version of cash primarily meant for retail consumption. They can be available for use by all private sector entities, non-financial consumers, and businesses.

• Wholesale (CBDC-W): They are designed for restricted access by financial institutions. They could be used to improve the efficiency of interbank payments or securities settlements.

How will the 'Digital Rupee' work?

As per the RBI press release, the pilot (trial) for retail Digital Rupee would cover select locations in closed user groups (CUG) comprising participating customers and merchants. The pilot will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real-time. Different features and applications of the (e₹-R) token and architecture will be tested in future pilots based on the learnings from this pilot.

The Digital Rupee (e₹-R) would be in the form of a digital token that represents legal tender. It would be issued in the same denominations as paper currency and coins. It would be distributed through intermediaries, i.e., banks. Users will be able to transact with e-Rupee or Digital Rupee through a digital wallet offered by the eligible banks and stored on mobile phones or devices.

Which are the banks participating in this phase-wise pilot?

RBI has approved 8 banks for phase-wise participation in this pilot. The first phase will begin with 4 banks, viz., State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank, in four cities (Mumbai, New Delhi, Bengaluru, and Bhubaneswar) 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 scope of the pilot may be expanded gradually to include more banks, users and locations as needed.

How will the 'Digital Rupee' transactions take place?

The Central Bank further clarified that both Person-to-Person (P2P) and Person-to-Merchant transactions (P2M) in digital rupee are possible. The party transferring the digital currency must have the recipient's public key (similar to a digital address). The recipient's private key (a unique password) is then used in conjunction with the public key to complete the transfer. Transactions are likely to be partially anonymous, with the possibility of mandatory disclosure for transactions with higher amounts. In contrast, those of smaller ones can remain anonymous, just like in cash transactions.

Users will be able to make payments through e-Rupee using QR codes displayed at merchant locations, just like online transactions are done. The official RBI release stated, "The e-Rupee would offer features similar to that of physical cash like trust, safety and settlement finality. As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks."

Watch this informative video to gain a comprehensive understanding of the digital rupee and its potential impact on the Indian economy. India's own digital currency is poised to revolutionize the way we interact with money.

What is the difference between 'e-Rupee' and UPI?

Unlike UPI, which requires a bank account and a debit card to make payments, 'e-rupee' does not require either of these for functioning.

• Intermediation - Since UPI is the transfer of money from one bank account to another, any UPI transaction involves the bank as the intermediary. Just like with paper currency, users of retail CBDC can exchange and transfer digital currency without the involvement of a bank as an intermediary. It will transfer immediately from one person's wallet to the other.

• Anonymity can be maintained - Anonymity is the key feature of transactions in CBDC, the e-Rupee will move directly from one wallet to another and hence will not leave any digital footprint. A third party cannot find out to whom the money has been transferred as this information is not available with a bank. Whereas UPI transactions can be tracked easily as they are reflected in the core banking system of banks.

• No physical currency backup - UPI transactions are backed by physical currency. If there is insufficient money in the user's bank account, the transaction will fail. In contrast, the e-rupee may be used to make digital payments instead of traditional money or cash. The RBI-issued digital rupee is a legal tender in itself. There is no need for physical currency to back it up.

• Single handle for all transactions - The UPI ID or handle varies depending upon the banks and platforms. Even linking two different platforms with the same bank account may generate different UPI IDs, but such is not the case for 'e-Rupee'. The digital rupee will be operated by RBI and not by bank intermediaries in the case of UPI The digital rupee will be operated by RBI and not by bank intermediaries in the case of UPI where each bank has a different UPI handle The digital rupee will be operated by RBI and not by the bank each Digital Rupee transaction will only need one public key (address).

• Transaction without a smartphone - Another major difference between the 'e-rupee' and UPI is that it will allow offline transactions which can be carried out on feature phones, promoting its adoption in rural and remote areas as well. Since the e-rupee coupon will be shared with the beneficiary through an SMS or QR code. This will enable its users in rural and remote areas with low internet connectivity to access the digital rupee simply via SMS without the need for a smartphone, unlike UPI where internet connectivity is the core of operating transactions.

Currently, making transactions above a certain threshold requires customers to disclose their permanent account number (PAN) to prevent illegal transfers and curtail the flow of black money. While no limit has been set for digital rupee transactions, the same rules will be applicable for retail CBDC the RBI Governor said.

How 'Digital Rupee' will eventually lead to a cashless economy?

India's digital payments have grown at one of the fastest rates of anywhere in the world over the past five years, thanks to cutting-edge payment platforms like the Unified Payments Interface (UPI). The UPI facilitates instant transfers between bank accounts via mobile devices. Millions of Indians use it daily to pay for everything from their electricity bills to a fruit vendor on the street.

India's sovereign-backed CBDC, or 'Digital Rupee', will have the same trappings and level of trust as the physical rupee since it will ride the latest technologies with RBI. Since retail CBDC is a direct liability of the central bank, it is believed that it can give users access to safe money for payments and settlement. The advantage of digital currency over existing digital payment systems is that payments through digital currency would be final without requiring interbank settlement.

When you hold money in your bank account, it usually earns interest, whereas digital rupees held in digital wallets wouldn't earn interest, and its value will remain constant. This can be used just like a physical rupee in most places. Although you won't be able to withdraw it in the form of physical currency, the Digital Rupee can be converted into cash via commercial banks.

With the introduction of digital currency, the cost of printing and dependency on physical currency will eventually reduce. As we can see, India has experienced significant growth in digital payments, which has increased demand for a cashless economy. The launch of the Retail 'Digital Rupee' paves the way towards a more secure and cashless digital transaction. This can potentially enhance the digitalisation of the financial sector in our economy.

"Going forward, other wholesale transactions and cross-border payments will be the focus of future pilots, based on the learnings from this pilot," the RBI said.

Warm Regards,
Mitali Dhoke
Research Analyst