The first pilot project for wholesale business in the Central Bank Digital Currency (CBDC) or digital rupee was launched on Nov. 1, 2022. One month later, the first pilot project for the retail digital rupee was unveiled on Dec. 1.
CENTRAL BANK DIGITAL CURRENCY
A CBDC or digital rupee is a digital form of currency notes issued by the central bank. Digital currency is an electronic form of money that can be used in contactless transactions.
Federal Finance Minister Nirmala Sitharaman proposed to introduce digital rupee, using blockchain and other technologies, to be issued by the RBI starting 2022-23 in her budget speech on Feb. 1, 2022.
Retail CBDC (CBDC-R) is potentially available for use by all, while wholesale CBDC (CBDC-W) is designed for restricted access to select financial institutions.
The RBI has identified nine banks for participation in digital rupee's wholesale pilot. These include State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.
However, for the retail pilot, the four banks -- State Bank of India, ICICI Bank, Yes Bank and IDFC -- will run business in the cities of Mumbai, New Delhi, Bengaluru and Bhubaneswar. Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank are expected to join the trial later, and the pilot business will also be later extended to other cities.
Experts say the CBDC will be equivalent to holding the same value size as individual banknotes and coins and would be distributed by banks. The CBDC would be in the form of a digital token that represents legal tender and it would be issued in the same denominations that paper currency and coins are currently issued.
The CBDC will reduce transaction costs. It will bring every transaction under the gaze of the government and thus increase its influence to access all transactions happening within the authorized networks.
The CBDC would also reduce the cost of printing currency notes and there is no threat of them getting torn, burnt or physically damaged or lost. In short, the lifeline of the digital currency will be indefinite compared to physical notes.
The advantage of the CBDC over existing digital payment systems is that transactions through digital currency would be final, without requiring interbank settlement.
Digital rupee transactions, which can be done via digital wallets and stored in mobile devices, are both person-to-person and person-to-merchant. Users can make their payments by scanning quick response (QR) codes at merchant locations.
The value of the CBDC will not be as volatile as cryptocurrency. Cryptocurrency has been controversial due to its decentralized nature, as its operation is carried out without any intermediary like banks, financial institutions, or central authorities. It is a medium of exchange based on blockchain technology.
On the contrary, the CBDC issued by the RBI will be a legal tender in a digital form. The CBDC will be different from Bitcoin, Ethereum and other cryptocurrencies in the sense it will be backed by the government.
The CBDC pilot project will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real-time. As per the RBI, different features and applications of the retail digital rupee token and architecture will be tested in future pilots, based on the learnings from this pilot.
"The CBDC would give greater anonymity than existing digital transactions and this is one of the major benefits for users," V Vaidyanathan, chief executive of IDFC First Bank was quoted in a local newspaper as having said.
At present, the CBDC is being done on a pilot basis, but in the future, it will be the next big thing in the payments space once it gathers some critical mass, Vaidyanathan said.
NO TIMELINE FOR FULL ROLLOUT
The RBI hopes the CBDC will facilitate cheaper and easier financial transactions, boost the nation's digital economy, lower the economy's reliance on physical cash, as well as protect people from the volatility of private cryptocurrencies.
However, it has not set a timeline for a full-scale rollout of the sovereign virtual currency.
"I don't want to give a target date by which time the CBDC will be launched in a full-scale manner because this is something where we have to proceed very carefully," local media quoted RBI Governor Shaktikanta Das as saying in November last year.