Q. Consider the following statements in respect of the digital rupee:

  1. It is a sovereign currency issued by the Reserve Bank of India (RBI) alignment with its monetary policy.
  2. It appears as a liability on the RBI’s balance sheet.
  3. It is insured against inflation by its very design.
  4. It is freely convertible against commercial bank money and cash.

Which of the statements given above are correct?

  • 1 and 2 only
  • 1 and 3 only
  • 2 and 4 only
  • 1, 2 and 4

Answer: (d) 1, 2 and 4

Digital Rupee or e₹
  • Digital Rupee or e₹, is India’s Central Bank Digital Currency (CBDC). It is legal tender and is the liability of Reserve Bank of India (as per Section 26 of the Reserve Bank of India Act, 1934).
  • It is the digital form of India’s physical currency, the Rupee (₹). e₹ is issued by the Reserve Bank of India (RBI) in digital form and offers features similar to physical cash like convenience of use, guarantee of RBI, finality of settlement, etc.
  • e₹ is stored in the user’s digital wallet and can be used to receive / send money, and / or make payment for transactions, just like any physical ₹ note.
  • e₹ can be held and transacted through e₹ wallets offered by banks and non-banks for person-to-person payments or person-to-merchant transactions.
    • One can start using the e₹ wallet by downloading the e₹ app from the Play Store or the App Store and by following the App instructions. Detailed instructions on using the e₹ wallet can be checked with the banks and non-banks providing the wallet. Payments to merchants can be made by scanning either the CBDC QR code or the UPI QR code available at the respective merchant location.
  • The digital rupee itself is not inherently protected against inflation. Its value can fluctuate depending on various economic factors, just like physical rupees.
  • Wholesale Central Bank Digital Currency (e₹-W):
    • Wholesale Central Bank Digital Currency (e₹-W) is designed for use by financial institutions and intermediaries, primarily to streamline interbank settlements and large-value transactions.
    • It operates within a restricted ecosystem and enhances the efficiency, speed, and security of wholesale payment systems by using the functionalities of programming and smart contracts.
    • Wholesale CBDC focuses on improving the financial system’s infrastructure and reducing settlement risks, retail CBDC aims to enhance accessibility, financial inclusion, and convenience for individuals / businesses. Retail CBDC is intended for the general public and is used for everyday transactions, much like physical cash but in digital form.
    • There are two ongoing use cases of e₹-W, (i) funds settlement of secondary market transactions in Government Securities, and (ii) settlement of inter-bank lending and borrowing in call money market. Settlement in central bank money is expected to reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk and benefitting from the programmability and smart contracts functionalities of e₹-W.
Central Bank Digital Currency (CBDC):
  • CBDCs are a digital form of a paper currency and unlike cryptocurrencies that operate in a regulatory vacuum, these are legal tenders issued and backed by a central bank.
  • It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
    • A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver.
  • 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.
  • Objectives:
    • The main objective is to mitigate the risks and trim costs in handling physical currency, costs of phasing out soiled notes, transportation, insurance and logistics.
    • It will also wean people away from cryptocurrencies as a means for money transfer.
  • Types of CBDCs:
    • Wholesale CBDCs: Used among banks and other licensed financial institutions for interbank payments and securities transactions.
    • Retail CBDC: It is available to general public via digital wallets, smartphone apps, etc. Two models of retail CBDC:
      • Token-based CBDCs: Enables anonymous transactions through private and public key authentication.
      • Account-based CBDCs: Requires user digital identification for account access. e.g., DCash of Eastern Caribbean.
  • Global Trends:
    • Bahamas has been the first economy to launch its nationwide CBDC — Sand Dollar in 2020.
    • Nigeria is another country to have roll out eNaira in 2020.
    • China became the world’s first major economy to pilot a digital currency e-CNY in April 2020.