RBI Launches The First Pilot Of Wholesale CBDC

In the expedition to the digitalization of money, RBI recently rocket-launched its first pilot project of wholesale CBDC on November 1. However, the Central Bank Digital Currency (CBDC) or eRupee is merely another form of sovereign paper currency and is not intended to be a replacement.

According to RBI, the rapid mushrooming of cryptocurrencies pose a potential threat to the country’s financial ecosystem. Therefore, the essential motivation driving RBI’s CBDC is to maintain the continuum with the digital revolution while hedging against credit and liquidity risks.

India has come a long way, from commodities to precious metals to paper currency to the recently launched digital currency. Accordingly, RBI has launched the eRupee in phases via multiple pilot projects. When put to viability tests, RBI envisages detecting privacy issues and its implication on banking systems and financial stability.

Do you want to know how CBDC will affect the country’s financial landscape? Or will the digital Rupee mark the end of the cryptocurrency era in India? Are you wondering how safe and secure this new legal tender is? If yes, you have landed at the best place to find answers to all your questions related to the central bank digital currency.

Overview of Central Bank Digital Currency (CBDC)

CBDC or eRupee has been introduced by RBI as a digital form, the same as sovereign currency exchangeable at par (1:1) with fiat currency. The primary consideration of RBI is to create a digital rupee closest to its physical form and make the execution process seamless. In the pilot project, wholesale CBDC will cover only secondary market transactions in government securities. The digital retail currency will also be introduced later based on the merits and transactional benefits. 

The RBI has currently identified nine banks for the pilot launch- State Bank of India (SBI), Bank of Baroda (BOB), the Union Bank of India (UBI), HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC.

The key intent is to.

• Make interbank transactions more efficient.
• Make transactions safe, smooth, cheap, and interoperable within and across the country.
• Ensure monetary and financial integrity.
• Provide a risk-free platform to deal in virtual currencies.

Features of CBDC

• It is a sovereign currency Central Banks issue based on their monetary policy.
• The eRupee will appear as a liability on the central bank’s balance sheet
• It will be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
• Freely convertible against commercial bank money and cash
• Fungible legal tender for which holders need not have a bank account
• Expected to lower the cost of issuance of money and transactions

Types of Central Bank Digital Currencies

Based on the use case, digital currency can be broadly categorized into- Wholesale (CBDC-W) and Retail (CBDC-R). CBDC-W is designed for the settlement of interbank and related wholesale transactions.  While CBDC-R, the digitalized form of physical cash is intended to make retail financial transactions more safe and efficient.

Forms of Central Bank Digital Currencies

RBI will float its digital currency in form of- token-based, account-based, or a combination of both. A token-based CBDC system is similar to a “bearer-instrument”, where the holder of the instrument at a given time is considered the owner. In an account-based CBDC system, you would require the records of balances and financial transactions of all the holders to establish ownership.

The digital currency for wholesale will be issued through an account-based system, allowing instant transfer and incorporating a well-understood and established legal system. Whereas retail digital currency will be issued through a token-based system as it ensures universal access and robust security.

Benefits of Issuing Central Bank Digital Currencies

According to the latest reports, 105 countries that constitute almost 95% of the World’s GDP are in the pilot stage of launching their own CBDC framework. The most recent launch is JAM-DEX, Jamaica’s digital currency which created a global buzz. Then, Sand Dollar (Bahamas) is proclaimed the most developed retail digital currency worldwide.

Let us try to understand the intrinsic values and benefits that are driving digital currency’s global acceptance. Though CBDC is in its early stages of research and development in India, we can anticipate a few advantages:

• Adopting digital reforms reduces reliance on cash.
• Reduced Currency management cost like the cost of printing, storing, transporting, and replacing bank notes.
• The e-Rupee system will boost India’s digital economy, augmenting financial inclusion and making monetary and payment systems more efficient.
• Convenient for Businesses and the Public.
• E-Rupee settlements are final thereby lowering settlement risks.
• The ease of use gives space for innovative products and services.
• More regulated, dependable legal tender, and real-time cross-border payments.
• Using Central Bank’s digital currency in offline mode as well will help cover the unbanked and deprived sections of our society.

What are the Challenges of Central Bank Digital Currency?

In the roadmap to launch a successfully functioning CBDC-W and CBDC-R, there is plenty that must be done. A few challenges the RBI faces include-

• Need for a strong data protection policy to prevent exploitation of any vulnerabilities in the infrastructure.
• Incorporate universality, finality, and anonymity in the same way that physical currency does. Dealing with this is difficult because all digital transactions leave a trail.
• Application user interfaces (APIs) should be used effectively to allow for the quickest recovery in the event of a system breach.
• Enhancing technical infrastructure to foster the recall feature that helps the system to release new security features if a series of tokens get hacked.
• Maintaining privacy and combat technology risks and other prevalent threats.
• Making a high-standard Business Continuity Plan.

Key Takeaways

We have demonstrated our appetite for digitalization and rapid acceptance of digital modes over time. COVID-19 has prompted the need to accelerate the payment digitalization process and find a substitute for the most preferred mode of transactions i.e. Cash. CBDC has revolutionized the payment landscape via ease of use coupled with a sovereign guarantee. Similar to the fiat currency, CBDC appears on the liability side of the Central Bank’s balance sheet.

With the RBI’s CBDC digital footprints, you can envision a more secure financial environment, mitigate cross-border and cross-currency risks, and reach out to the unbanked and financially disadvantaged segments of society. Another reason for introducing digital currency is to safeguard the public from the alarming volatility of virtual currencies. CBDC’s interactive technology design and expected benefits make it as appealing as physical cash, if not more so.

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