- The first pilot for the digital rupee, wholesale segment (e₹-W) will commence on November 1, the Reserve Bank of India said.
- “The use case for this pilot is settlement of secondary market transactions in government securities,” the RBI said. “Use of e₹-W is expected to make the inter-bank market more efficient. 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,” it added.
Central Bank Digital Currency (CBDC)
- According to the 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.” The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
- Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
- CBDCs enable the user to conduct both domestic and cross-border transactions which do not require a third party or a bank.
How will CBDC help?
- Minister of State for Finance Pankaj Chaudhary had told Lok Sabha last year: “Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk. Introduction of CBDC would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.”
- There are also associated risks which need to be carefully evaluated against the potential benefits.”
- Chaudhary announced that RBI had proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch a CBDC.
- The government had been planning at the time to introduce a Bill in Parliament that would prohibit “all private cryptocurrencies in India” with “certain exceptions”.
- “Government has received a proposal from Reserve Bank of India in October 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form. RBI has been examining use cases and working out a phased implementation strategy for introduction of CBDC with little or no disruption,” Chaudhary told Lok Sabha.
- RBI has repeatedly flagged concerns over money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc. Introducing its own CBDC has been seen as a way to bridge the advantages and risks of digital currency.
- There are several models proposed by technology experts and evangelists on how the digital rupee could be transacted, and the formal announcement by the RBI will likely provide the details. One chief difference could be that a digital rupee transaction would be instantaneous as opposed to the current digital payment experience.
SOURCE: THE HINDU, THE ECONOMIC TIMES, PIB