Digital Rupee: RBI Commences e₹ Pilot. Here Are All Your CBDC FAQs Answered

Digital Rupee will “push India to become a part of the virtual currency race,” said Mudrex CEO Edul Patel.

Digital Rupee is a legal tender that is issued by the RBI. ( Image Source :Getty )

The Reserve Bank of India (RBI) has finally launched a pilot for its central bank digital currency (CBDC). Dubbed Digital Rupee, or e₹, India’s CBDC is being rolled out in two forms, specifically designed for two different use cases:  e₹-W (wholesale segment) and e₹-R (retail segment). With this move, India will join a long list of countries — including neighbouring Pakistan and China — to tap into the crypto sector with a central bank-issued digital coin. Here’s everything you need to know about India’s Digital Rupee.

What is a CBDC? How does it differ from cryptocurrency?

Let’s start with the basics. In a nutshell, a CBDC is a legal tender that is issued by a central bank. The only difference it has with a regular fiat currency is that the CBDC is in a digital form. 

A country’s CBDC is exchangeable one-to-one with the national currency. 

Since a CBDC is only a digitised version of a fiat currency, it won’t fluctuate in value over time. Hence, a CBDC is not a volatile asset, like most popular cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), and Dogecoin (DOGE).

When did India announce the Digital Rupee?

The term ‘Digital Rupee’ was first introduced by Finance Minister Nirmala Sitharaman in February this year, during her Union Budget address. She said that the launch of the Digital Rupee will be done in the current fiscal and that it would lead to a cheaper and more efficient currency management system. 

ALSO SEE: Why India Is Keen On Introducing A CBDC

Why are central banks exploring CBDCs?

Nearly 90 percent of central banks across the globe are now exploring CBDCs, with one-fourth of them being in the advanced stage of running a pilot, as per a study by the Bank of International Settlements (BIS), adding that the number of central banks developing their own CBDC has doubled in the last one year. 

It only makes sense that India would want to jump on to the CBDC bandwagon, not only to reap its benefits, but also put the country on the global digital currency map. The recent spurt of interest in cryptocurrencies among investors and companies alike have also nudged governments to sit up and take notice. 

Additionally, central banks would ideally like to be the sole issuer of currencies within a nation. So, CBDCs could be seen as a safeguard against the growing market of decentralised digital coins, to help central banks get a better understanding of the space before taking regulatory decisions. 

What are the advantages of the Digital Rupee?

Now, at first glance, it might appear that the basic functionalities of the fiat Rupee and the Digital Rupee are the same. However, Digital Rupee is expected to play a key role in digital transactions.

Digital transactions done through Unified Payments Interface (UPI) platforms such as BHIM, Google Pay, or PhonePe involve the use of the banking system. Users have to link their bank accounts with the UPI for doing an online transaction, whether it's for payments or transferring money. 
However, the CBDC would not involve the use of the banking system and it would be a direct claim on the central bank, i.e., the RBI in India’s case, rather than the financial institutions.

What is the function of e₹-W?

As mentioned earlier, India’s CBDC will be divided based on two use cases —  e₹-W (wholesale) and e₹-R (retail). The pilot for e₹-W has been commenced by the RBI on November 1. 

As per an RBI press release, the e₹-W has been designed to increase the efficiency of the inter-bank market. The regulatory body claimed 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.”

Commenting on the pilot, the RBI said that the learnings from this pilot will help plan future pilots that will focus on other wholesale transactions and cross-border payments. 

Which banks are part of the e₹-W pilot?

As per the RBI, a total of nine banks have been identified for participation — 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.

When will e₹-R be launched?

Although an official date is yet to be announced, RBI said that the e₹-R (retail) will be launched within this month. It will first be launched in select locations in closed groups, comprising both customers and merchants. 

How is India’s crypto sector reacting to the e₹-W pilot?

Edul Patel, the CEO and co-founder of Mudrex called the pilot a “progressive move” as it would help transition towards a digital economy and enhance financial inclusion. 

Patel told ABP Live, “Digital Rupee will aid in making the Indian banking industry more efficient and transparent. With the help of the e₹, cross-border money transfers can operate more seamlessly than ever before. As most countries now have digital currency, the move will also push India to become a part of the virtual currency race.” 

“The pilot project will test the settlement of transactions on the secondary market with government securities,” said Sathvik Vishwanath, the co-founder and CEO of Unocoin. “This will lead to real-time settlement and cost-effectiveness in the pilot project and pave the way for a range of use cases over time, both for intra-country and cross-border transactions.”

“This is yet another momentous step towards a ‘digital-first’, paperless Indian economy as envisioned for the longer term future,” Tezos India’s Head of Operations, Poorvi Sachar, told ABP Live. “This move also indicates the Indian Government’s strong intent towards the legitimation of VDAs and associated financial transactions and use of technological innovations to the fullest in the near-term future.”

“With the growth of nonbank players in payments, central banks face potential erosion of their oversight role in important areas such as data management, settlement systems, and customer rights—areas they have historically supervised through traditional licensed banks. Central banks have also struggled to achieve efficiencies in areas such as cross-border payments. A CBDC alternative would allow more direct control and influence over enforcement of minimal market standards,” explained Centricity Wealth Tech founding partner Manish Sharma.

Sharma added, “Public-private partnerships will be essential to the success of a CBDC launch, enabling central banks to leverage established infrastructure and client relationships. Such alliances will help central banks implement use cases aligned with end-user needs, complementing their gaps in capabilities and knowledge of consumption habits, particularly in a retail scenario.”

“The Digital Rupee will be different from other cryptocurrencies in the sense that it will be backed by the government,” said Soclly co-founder Prayag Singh. “Secondly, having an intrinsic value on account of government backing, the Digital Rupee will be equivalent to holding a physical rupee equivalent.”

Akshay Bajaj, the CEO and co-founder of DeFiVerse believes that the Digital Rupee pilot is to test the e₹-W between banks and the government. “It will be used to purchase government securities. The final aim of any CBDC is to allow cross-border payments and reduce fees,” Bajaj said. “Since the government is still wary of cryptocurrencies, they seem to be exploring CBDCs as a more controlled currency choice.”

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.