The Reserve Bank of India (RBI) on Tuesday (1 November) will launch the first pilot project for central bank digital currency (CBDC), also known as digital rupee or e-rupee. According to the RBI notification, the first digital rupee pilot will be in the Wholesale segment (eâ1-W), and the central bank has identified nine banks to participate in commencing the first pilot. The nine banks are State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC. The pilot project will focus on settlement of secondary market transactions for government securities.
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Will digital rupee be available to all?
Note that the Central Bank Digital Currency (CBDC) is a digital form of legal tender issued by the RBI. India’s CBDC will be called ‘e₹’, and it can be exchanged one-for-one for fiat currency as it is a digital form of rupee. “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,” RBI had said. This e-rupee or digital rupee will be initially available for the wholesale segment and extended to the retail category in a month. According to the banking regulator, a pilot project for retail e-rupee will start within a month in select locations in closed user groups.
Use cases for e₹-W, or wholesale digital rupee
RBI in a release on Monday stated that the use case for the wholesale pilot is settlement of secondary market transactions in government securities. Use of e₹-W, or wholesale, is expected to make the inter-bank market more efficient, it said adding that, settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. “Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learnings from this pilot,” RBI said.
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Digital rupee not a private virtual currency
It is worth noting that Union Finance Minister Nirmala Sitharaman said earlier this year in February that RBI will launch a CBDC in 2022-23, marking the first official statement from the Union government on the launch of a digital currency. Introduction of CBDC will boost the digital economy and it will be based on the blockchain technology, theFM had said then. Not to be confused with cryptocurrency, a CBDC is the digital form of legal tender and is different from private virtual currencies. An RBI report had earlier described CBDC as something that will provide a safe, robust, and convenient alternative to physical cash.
Depending on various design choices, it can also assume the complex form of a financial instrument, the RBI report had said. In a concept note dated 7 October, RBI had mentioned that it will soon start pilot launches of digital rupee for specific use cases. The concept note was released with an aim to provide a high-level view of motivations for the introduction of CBDC in India. Since the RBI has repeatedly expressed concerns about private cryptocurrencies such as Bitcoin, Ether, and others being used for money laundering, terror financing, and tax evasion, the introduction of its own CBDC has been viewed as a means to use the benefits of a digital currency while eliminating the risks of the same.
