In recent years, the world has seen a significant shift towards digital financial systems, and the Indian government has been quick to recognize the potential benefits of a digital currency. The Indian Digital Rupee for Wholesale (e₹-W) was launched on 1 November 2022 to settle secondary market transactions in government securities. It will help cut transaction costs and prevent the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. This new currency is expected to bring several advantages, including increased efficiency, transparency, and cost-effectiveness, while also reducing the risks associated with physical cash handling. Here is an extensive look into the Indian digital rupee.

Why did India Launch CBDCs?

Central Bank Digital Currency (CBDC) is a digital form of legal tender issued by a central bank and is exchangeable one-to-one. The currency is exchanged through blockchain-based wallets and is expected to offer an alternative to traditional payment systems.

India’s decision to launch a CBDC is based on the reasons mentioned by the Reserve Bank of India, such as the reduction of costs associated with physical cash management, supporting competition, efficiency, and innovation in payments, and exploring the use of CBDC for improvement in cross-border transactions.

One of the key advantages of CBDC is that it might reduce the risks associated with traditional payment systems. For instance, the use of CBDC can lower the risks of counterfeiting and money laundering, and provide a more transparent and secure payment system. It can also offer a faster and cheaper payment system, reducing transaction costs and increasing financial inclusion.

CBDCs can help central banks to maintain their control over the money supply, and monitor and regulate the flow of funds in the economy. This can be useful in times of economic instability or crisis, as central banks can quickly inject liquidity into the system through issuing CBDCs.

The use of CBDCs can also potentially improve cross-border transactions, by reducing the reliance on intermediaries and increasing the speed and efficiency of settlements. This can lead to a reduction in transaction costs and an increase in trade volumes.

India’s decision to launch a CBDC reflects its commitment to embracing new technologies and staying ahead in the digital currency race. The launch of the digital rupee might revolutionize India’s payment systems, increase financial inclusion, and provide a more transparent, efficient, and secure payment system.

What is the digital rupee?

The digital rupee is a digital form of legal tender issued by the Reserve Bank of India (RBI). Simply put, it is a digital version of the physical Indian rupee. Like physical currency, it can be exchanged for goods and services, but in digital form, it is expected to be easier, faster, and cheaper to use.

Unlike cryptocurrencies, which are decentralized and not backed by any government or central authority, the Indian digital rupee is a centralized currency backed by the RBI. This means that it is not subject to the volatility associated with cryptocurrencies and can provide greater stability and security to users.

In terms of functionality, the digital rupee is not substantially different from physical banknotes. It can be used for a wide range of transactions, including online purchases, person-to-person payments, and payments to merchants. The currency will be exchanged through blockchain-based wallets and will be freely convertible against cash.

While physical banknotes have been the primary form of currency in India, the digital rupee aims to offer an alternative payment avenue to users. The RBI believes that the digital rupee system will bolster India’s digital economy, enhance financial inclusion, and make monetary and payment systems more efficient. By broadening the rupee to include digital currency, the RBI aims to reduce the cost associated with physical cash management and further the cause of digitization to achieve a less cash economy.

Pilot Program of Indian Digital Rupee

The Reserve Bank of India’s (RBI) announcement of the digital rupee has garnered significant attention, and many are keenly awaiting its rollout. To test the digital currency’s robustness, the RBI has launched a pilot program, which will cover select locations in a closed user group (CUG) comprising taking part customers and merchants. This will allow the RBI to test the entire process of digital rupee creation, distribution, and retail usage in real time.

The pilot program will initially cover four cities: Mumbai, New Delhi, Bengaluru, and Bhubaneswar, and later extend to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla. Eight banks have been identified for phase-wise participation in this pilot, with the first phase beginning with four banks: State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank in four cities across the country. Four more banks, Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank, will join the pilot subsequently.

The pilot program aims to test unique features and applications of the e₹-R token and architecture, based on the lessons from this pilot. The digital rupee will be transacted through a digital wallet offered by the taking part in banks and stored on mobile phones/devices, allowing users to transact with e₹-R through a digital wallet. Transactions can be both Person to Person (P2P) and Person to Merchant (P2M), and payments to merchants can be made using QR codes displayed at merchant locations.

One of the key features of the retail digital rupee is that it offers features of physical cash like trust, safety, and settlement finality. As with cash, the e₹-R will not earn any interest and can be converted to other forms of money, like deposits with banks. The digital rupee is expected to help get rid of the problem of fake currency, and the cost of printing paper notes will be saved.

Features and Benefits of Indian Digital Rupee

The digital rupee comes with a range of features and benefits that set it apart from traditional forms of currency. One of the key benefits of the digital rupee is its real-time tracking and ledger maintenance through blockchain technology. This makes it easier to monitor transactions and ensure the integrity of the currency. The digital rupee offers lower transaction costs, which will help to make financial transactions more accessible and affordable for people across the country.

Another major advantage of the digital rupee is its ability to facilitate fast cross-border transactions. By using blockchain technology, the digital rupee can be quickly and easily transferred between parties, regardless of their location. This will help to make international trade and commerce more efficient and streamlined, which could be a significant boost to the Indian economy.

One of the biggest benefits of the digital rupee is its potential to help get rid of the problem of fake currency. By using a digital currency that is backed by the government, it will be much harder for counterfeiters to produce fake currency notes. This will help to ensure the integrity of the Indian currency and protect it from fraud.

Besides these benefits, the digital rupee is also expected to save costs associated with printing paper notes. With digital currency, there is no need to print physical notes, which can be a costly and time-consuming process. By eliminating the need for paper notes, the digital rupee will help to reduce the environmental impact of currency production and ensure a more sustainable future.

Comparison with Cryptocurrencies

The Indian digital rupee and cryptocurrencies, such as Bitcoin and Ethereum, have several key differences. While both are forms of digital currency, the digital rupee is backed by the Indian government, whereas cryptocurrencies are decentralized and operate with no intermediary, like banks, financial institutions, or central authorities.

The digital rupee has intrinsic value on account of government backing, making it equivalent to holding a physical rupee equivalent, whereas the value of cryptocurrencies is determined by market demand and supply.

Another significant difference is the purpose of the digital rupee versus cryptocurrencies. The digital rupee should complement, rather than replace, current forms of money and provide an additional payment avenue to users, while cryptocurrencies aim to disrupt traditional financial systems and replace fiat currency altogether.

The digital rupee is subject to regulation and government oversight, which ensures that it adheres to laws and guidelines that protect users and prevent illegal activities. In contrast, cryptocurrencies are largely unregulated, which has led to their association with criminal activities, such as money laundering and terrorist financing.

Growing Trend of National Digital Currencies

The trend of national digital currencies is on the rise, and India is not alone in exploring the possibility of launching CBDCs. In fact, just one day before India’s announcement, the central bank of Jamaica rolled out a national digital token in the first quarter of 2022. This move is aimed at reducing transaction costs and offering financial services to citizens who do not use banks.

A group of Eastern Caribbean nations, including Grenada, Saint Lucia, and Antigua launched a digital currency in 2021 called DCash. Japan, China, and the United States have also reportedly explored the possibility of launching CBDCs.

This growing trend of national digital currencies raises questions about the importance of decentralization and regulation to the broader success of cryptocurrencies. While CBDCs offer many benefits, including lower transaction costs and faster cross-border transactions, they are centralized and issued by the government. This is in contrast to decentralized cryptocurrencies like Bitcoin, which are not issued by any central authority and operate on a peer-to-peer network.

Is Massive Indian Digital Rupee Adoption Workable?

For any digital currency to scale and effect a significant change in the payments framework, it has to gain acceptance among all stakeholders, from commercial banks to intermediaries and end users. Here are a few major reasons that make this adoption workable:

1. India has a large population with strong internet penetration, making digital adoption an easier task.

2. Digital infrastructure is increasingly becoming available in the country, making it easier for businesses to take advantage of the technology.

3. Companies are investing heavily to promote digital products and services, creating more opportunities for users to adopt them quickly and easily.

4. The cost of transitioning from traditional methods of marketing and conducting business operations to digital ones is significantly lower than in other countries because of India’s competitive market conditions.

5. Indian citizens possess a high level of technical proficiency that enables them to learn about any new technology-related product or service on offer in the market quickly.

6. Government initiatives are also being taken up by various agencies throughout the country regarding training and skilling efforts related to technologies such as artificial intelligence (AI) and machine learning (ML), thus reducing the time taken for adoption and increasing efficiency in operations overall.

7. The ever-increasing availability of mobile payment apps has made transactions simpler than ever before, allowing customers access to products or services at their fingertips in just a few clicks or taps while providing businesses easy access to resources needed for expansion.

Conclusion

The Indian digital rupee is a significant step towards the digitization of the Indian economy, with the potential to revolutionize the country’s payment system. As the Reserve Bank of India moves forward with its pilot program, the digital rupee is expected to provide a more efficient, cheaper, and faster alternative to traditional payment systems.

As highlighted in this guide article, the digital rupee offers several benefits, including reduced transaction costs, real-time tracking, ledger maintenance through blockchain technology, and fast cross-border transactions. The digital rupee can help India get rid of the problem of fake currency and save costs associated with printing paper notes.

With the growing trend of national digital currencies, India’s proposal to launch the CBDC is a significant move towards keeping pace with the global developments in the world of digital currencies. As the world moves towards a cashless economy, CBDCs offer an alternative to traditional payment systems, providing greater efficiency, transparency, and security.