After a month of e-rupee transaction in the wholesale segment, the Reserve Bank of India (RBI) will release the central bank digital currency (CBDC) for retail customers and merchants in four cities, including Mumbai and Delhi, from December 1 on pilot basis.
The pilot would initially cover four cities — Mumbai, New Delhi, Bengaluru and Bhubaneswar — and later extend to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla, the central bank said on Tuesday, adding the scope of the pilot may gradually expand to include more banks, users and locations as needed.
The pilot would cover select locations in a closed user group (CUG), comprising participating customers and merchants, the RBI said. The CBDC, or e-rupee (e-R), would be in the form of a digital token that represents legal tender. The RBI has identified eight banks for phase-wise participation in this pilot. The first phase will begin with four banks — State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank across the country. Four more banks — Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank — will join this pilot subsequently, it said.
E-rupee would be issued in the same denominations that paper currency and coins are currently issued. It would be distributed through intermediaries, i.e., banks.
“Users will be able to transact with e-R through a digital wallet offered by the participating banks and stored on mobile phones and devices, according to the central bank. Transactions can be both person to person (P2P) and person to merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations. “The e-R would offer features of physical cash like trust, safety and settlement finality. As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks,” the RBI said.
According to the central bank, the pilot will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real time. “Different features and applications of the e-R token and architecture will be tested in future pilots, based on the learning from this pilot,” it said.
“This (retail launch) indicates the consistent efforts on the part of RBI to bring out an efficient, user-friendly mechanism of digital currency far ahead of other central banks across the world,” said Jyoti Prakash Gadia, Managing Director, Resurgent India.
On November 1, the RBI took a major leap towards making the country’s monetary and payment systems more efficient with the launch of digital rupee for the wholesale segment to settle secondary market transactions in government securities. The model chosen for the retail rupee is different from the earlier announced for the wholesale rupee which is being used by banks for government security transactions.
“The token-based mechanism as announced by the RBI for retail is more suited for the common retail customers both for individual customer transactions with select merchants and also for one individual with another individual, initially to be used within the selected closed group,” Gadia said.
According to analysts, the four top cities have been chosen for the pilot launch due to sufficient availability of customers who are well-versed in digital transactions.
“Based on the learning from the pilot launch further improvement and sophistication are expected with wider coverage by leveraging the strong digital infrastructure of the nation by the RBI,” said a merchant banker.
TWO TYPES OF E-RUPEE
Based on the usage and the functions performed by the digital rupee and considering the different levels of accessibility, RBI has demarcated the digital rupee into two broad categories — retail and wholesale.
Retail e-rupee is an electronic version of cash primarily meant for retail transactions. It will be potentially available for use by all — private sector, non-financial consumers and businesses — and can provide access to safe money for payment and settlement as it is a direct liability of the central bank. Wholesale CBDC is designed for restricted access to select financial institutions. It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market more efficient and secure in terms of operational costs, use of collateral and liquidity management.
100 DIGITAL CURRENCIES GLOBALLY
As of July 2022, there were nearly 100 digital currencies by various global central banks in research or development stages and two fully launched: the eNaira in Nigeria, unveiled in October 2021, and the Bahamian sand dollar, which made its debut in October 2020, according to IMF. Countries have different motives for exploring and issuing CBDCs, but in the case of The Bahamas, the need to serve unbanked and under-banked populations across more than 30 of its inhabited islands was a primary driving force, it says.
Beyond promoting financial inclusion, leading experts argue that CBDCs can create greater resilience for domestic payment systems and foster more competition, which may lead to better access to money, increase efficiency in payments, and in turn lower transaction costs. CBDCs can also improve transparency in money flows and could help reduce currency substitution (when a country uses a foreign currency in addition to, or instead of, its own), IMF says.