Experts Explain Benefits And Technological Challenges Of Digital Rupee

The RBI launched the first pilot project on retail digital rupee in Mumbai, New Delhi, Bengaluru, and Bhubaneswar on Thursday

The retail digital rupee (e₹-R) project has started in a closed user group with the participation of four lenders – SBI, ICICI Bank, YES Bank, and IDFC First Bank – as well as customers and merchants.

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India’s first pilot project on retail digital rupee was rolled out by the Reserve Bank of India (RBI) on Thursday in Mumbai, New Delhi, Bengaluru, and Bhubaneswar.

The retail digital rupee (e₹-R) project has started in a closed user group with the participation of four lenders – State Bank of India, ICICI Bank, YES Bank, and IDFC First Bank – as well as customers and merchants. The launch comes a month after the central bank started a pilot in the digital rupee, wholesale on November 1.

In the second phase of retail digital rupee project, nine more cities and four more banks will be included, according to the RBI statement.

Analysts have highlighted the advantages and and challenges of the digital rupee.

Sathvik Vishwanath, co-founder and CEO at Unocoin, said, "With the creation of RTGS, NEFT, IMPS, UPI, Bharat Bill Payment System (BBPS) and National Electronic Toll Collection (NETC), India has made significant and remarkable progress towards payment system innovation. As highlighted in the concept note, the use of CBDC has advantages over other payment methods that include reducing operational costs associated with managing physical cash, promoting financial inclusion, bringing resilience, efficiency and innovation to the payment system, and increasing settlement efficiency. The system supports innovation in cross-border payments and provides the public with the benefits that any private virtual currency can provide, without the associated risks."

On the technical challenges part, Vishwanath said, “Cash-like features for CBDCs such as very wide acceptance and convenience, instant processing, 24/7/365 availability and offline capabilities. Compatibility with Prevailing Point-of-Sale Hardware to Stimulate Merchant Adoption and Adoption Policymakers may consider subsidising merchants to purchase necessary technology upgrades. In terms of privacy, physical cash is highly private to all parties except the payee in many cases they see the identity of the payer; privacy considerations for CBDCs may take note of the personal data protection profiles of the various payment technologies in the bank."

Dr P Hima Jagathi, associate professor, KLH Global Business School, Kondapur, said, “CBDC or national digital currency is the digital form of a country’s fiat currency. Instead of printing paper currency or minting coins, the central bank issues electronic tokens. This token value is backed by the full faith and credit of the Government. This will make online payments more secure and risk-free, boost the digital economy and also ease the development of a global digital payment system. The digital rupee will revolutionize the Fintech sector by creating new opportunities and lessening the burden of handling, printing, and logistics management of cash. Further, the digital rupee will prevent the counterfeiting of currency, black money and corruption. The major technology challenge is potential cyber security threat. With the advent of digital currency, cyberattacks might increase and threaten digital theft. The digital currency must collect certain basic information about an individual so that the person can prove that he’s the holder of that digital currency."

Prof Vishal Sarin, Mittal School of Business, Lovely Professional University, said, “The idea of digital rupee will be a game changer in times to come. It will infuse more trust, resilience and efficiency into the system and helps to reduce cost of transaction. It will be centralised currency fully backed by RBI, which will make it fully legal and acceptable by everyone. Due to blockchain technology, digital rupee can be uniquely identifiable and traceable which will help the governments to implement welfare schemes properly. As digital rupee is no longer bound to geographical locations even non-residents can also hold it to complete cross border financial transactions. This rupee will help to mitigate digital financial frauds, which will save a lot of money in the system and will invite more people to use the digital rupee, as most of the people are shying away from using digital transactions because of digital financial frauds. Moreover, no bank account is required to initiate transactions in DR, which will augur financial inclusion goals. But digital rupee brings more challenges to banks. Banks with weak infrastructure to support blockchain may suffer badly. Pervasive online transactions will create less liquid balance sheets, which will make banks more vulnerable. Commercial banks' autonomy may be at stake; digital rupees will be controlled by the RBI."

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