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Everything you need to know about Indian Central Bank’s CBDC project— digital rupee

Issued by RBI, CBDC is the digital form of the country’s fiat currency and will work like physical cash stored on mobile drives

The Reserve Bank of India announced that it will run a pilot to test digital rupee (e₹-R) for the retail segment starting December 1, 2022. It has been a week since the pilot commenced but there still remains ambiguity over digital rupee. We have tried to demystify some of the issues surrounding the digital rupee in this post:

What is a digital rupee?

It can be understood as digital currency issued by the central bank – Central Bank Digital Currency (CBDC) – which will carry the same force as fiat money.

What do we mean by Central Bank Digital Currency?

It is the digital form of a country’s fiat currency which is issued by the central bank of a country. The digital rupee is backed by the RBI which also issues currency notes in India.


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How many types of CBDC exist? What is the difference between retail and wholesale?

There are two types of CBDC— wholesale and retail. Here is how they are different:

Wholesale: It is meant for financial institutions like banks that hold reserve deposits with a central bank. “It could be used to improve payments and securities settlement efficiency, as well as to reduce counter-party credit and liquidity risks”, a post on Medium explained.

Retail: It is the version of CBDC available to ordinary people to carry out transactions. The RBI announced that the pilot which started on December 1, 2022, was for the retail version of the CBDC.

Who will manage CBDC?

There are two models for the management of CBDCs, according to Razorpay:

  • Direct model (Single-tier model) – The central bank will manage everything in the CBDC system,
  • Indirect model (Two-tier model) – The currency will be issued to users through banks and other intermediaries.

How will the wholesale pilot work?

The RBI explained that they aim to focus on the “settlement of secondary market transactions in government securities” in the pilot. The central bank added that the digital rupee would reduce transaction costs by “pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.”

How will digital rupee work?

It will work just like physical cash wherein users in the closed group will be credited with tokens in their wallets that will be offered by participating banks. These wallets will be stored on their mobile drives and they can make and receive payments via QR codes or through wallets.

Which banks are participating?

The first phase will see participation of the following four banks—

  • State Bank of India,
  • ICICI Bank,
  • Yes Bank,
  • IDFC First Bank.

It will be live in four cities— Mumbai, New Delhi, Bengaluru, and Bhubaneshwar.

How is it different from UPI transactions?

A UPI transaction will be entered in two bank account statements which are maintained by commercial banks. A transaction via digital rupee will not be registered as an entry in your commercial bank accounts and the record will be maintained by RBI itself, Livemint explained.

How is it different from cryptocurrencies?

It must be noted that unlike crypto which is decentralised and not linked to or regulated by any government, CBDC is centralised. Also, while every transaction made via cryptocurrencies is recorded on the blockchain which can be viewed by anyone, the record of CBDC transactions will not be available for everyone to see.

Will you be able to invest in digital rupee and earn interest?

The central bank said that digital rupee will not accrue any interest falling in line with the nature of physical cash which does not attract any interest. The RBI said that users will be able to convert their digital rupee into bank deposits.

Why is the Indian government keen on rolling out CBDC?

It is no secret that the RBI does not like cryptocurrency. It has made it clear on numerous occasions that cryptocurrencies pose a danger to the Indian economy. A digital rupee helps counter some of the touted benefits of crypto like swift transactions and saving on costs of printing money.

The Indian government has been eager to move towards a cashless economy ever since it embarked on a “disaster” called demonetisation in 2016. A digital rupee helps the government rope in more people into the financial fold.

Will it replace physical cash?

You may not have to worry about physical cash since the digital rupee is merely physical cash in its digital form. The RBI has called it legal tender.

How will it benefit users?

People will not have to worry about carrying physical cash as they can transact through their mobiles phones. It will be convenient to keep track of receipts and payments.

What are the challenges?

Concerns regarding user privacy are being raised as every transaction will get recorded with the RBI. There is also a threat of government overreach in the absence of privacy and a data protection bill. In fact, Nandan Nilekani has previously urged the government to bake anonymity into the CBDC project.

The RBI, in its concept note, had highlighted the need to respect privacy and data protection in the CBDC system, writing that “appropriate degree of anonymity” in CBDC is a “political and social question” rather than a “narrow technical question”.

It ruled out “truly anonymous payments” citing the need to be compliant with money laundering regulations but it added that the system can still offer control to users over how their data is shared and protect their privacy.

There is the problem of lack of internet connectivity in India since millions of people are still beyond internet coverage. It must be remembered that wallets on mobiles remain vulnerable to cybersecurity threats in the absence of a cybersecurity policy. The rising number of scams on UPI is a matter of significant concern.

What are RBI’s thoughts on CBDC?

The RBI noted that the potential impact of introducing CBDC on monetary policy is still unclear and is purely speculative. The central bank observed that the CBDC project is being explored by a limited number of countries across the world which left them without a precedent. The RBI has been cautious in its approach given that it took more than a year before it commenced pilots for the CBDC project. It remains to be seen how swiftly the public roll-out takes place as there is no clarity on the timeline for the same.


This post is released under a CC-BY-SA 4.0 license. Please feel free to republish on your site, with attribution and a link. Adaptation and rewriting, though allowed, should be true to the original.

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Written By

I cover several beats such as Crypto, Telecom, and OTT at MediaNama. I can be found loitering at my local theatre when I am off work consuming movies by the dozen.

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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