10 Things to know about blockchain-based ‘‘Digital Rupee’ backed by the RBI | The Financial Express

10 Things to know about blockchain-based ‘‘Digital Rupee’ backed by the RBI

CBDC-R is for consumers and business organisations, and CBDC- W is for selected financial organisations governed by the country’s experts.

10 Things to know about blockchain-based ‘‘Digital Rupee’ backed by the RBI
The indirect model will follow all the necessary compliance and regulations such as KYC, AML, and CFT and will be governed by the central bank as well as by other independent middlemen.

By Bharat Patel

Given the latest development of technology and its influence on the economic structure of the country, RBI has rolled out the country’s own digital currency, the ‘Digital Rupee’. The profitable decision comes after the government’s consideration of the rise in blockchain technology and the worldwide implementation of digital currency.

The evolution of technology-backed digital payment services has aided the growth of smarter and more secure ways of transferring monetary assets. The current phase of innovative revolutions is being steered by Blockchain, a technology that has been innovating disruptions in the financial market on fundamental levels. What is the Digital Rupee? And will it replace physical currencies in the coming future?

Here are the top 10 things that you should know about the “Digital Rupee”.

1. The concept of the digital version of the Indian rupee was proposed way back in January 2017. RBI started evaluating the pros and cons of the digital rupee and it took roughly 5 years to reach an adequate conclusion in the fiscal year of 2022-23.

2. The Digital Rupee has been rolled out on a pilot basis with an effective date of November 1st, 2022. RBI mentioned that the key motivation to introduce digital currency was to reduce the current operational cost and bring resilience, efficiency, and technological scalability.

3. Digital currency is not a cryptocurrency, but cryptocurrency falls under the category of digital currency. The rollout of digital currency was a crucial step to address the rising phase of private cryptocurrencies. The only difference is that the Digital Rupee is monitored, controlled, and managed by governing bodies that implement certain sets of rules and regulations.

4. The Digital Rupee is backed by blockchain technology which will help in increasing efficiency and transparency. Blockchain technology establishes a system of networks in which all the asset transactions are monitored, and the information privacy at both ends is maintained. Altering the information is difficult as it uses a hash code development method. Meaning, in blockchain, the blocks of data related to an asset or series of assets is in the form of a chain, each chain of blocks has a complex integer attached to it which is immutable and cannot be altered without specific permission from the source or end source.

5. One of the greatest advantages of operating with digital currency is that it makes cross-border payments easier to execute. Digital currency will positively impact the non-commercial transfer of funds between economies by reducing the transaction fee between two foreign parties. These non-commercial funds have been the biggest drivers of economic development in many countries.

6. One of the beneficial characteristics of blockchain is that it is a highly secure and sustainable financial system that enables the digitization of paperwork, records, and other documents related to the financial sectors of the country without any compromise.

Moving the whole financial ecosystem to a digital platform provides scalability, and the UPI payment transaction applications are a good example of this. Hence, it will make trading easy, eliminate cyber-criminal activities that upset our economic growth, and act as a big red book of money records for business organisations that focus on profits rather than socio-economic objectives.

7. India spends a lot of resources on printing money in the form of coins and paper. Utilising digital currency to its fullest extent will allow the government to save nearly ₹4000 crores in operating costs.

8. An enormous advantage is that the digital currencies you possess are equivalent to a physical currencies like cash or coin, and so you can exchange them. However, these digital transactions require internet connection and digital devices like smartphones, laptops, and tablets, currently posing as the major challenge.

9. The Digital Rupee will have two types of models, direct and indirect. The indirect model will follow all the necessary compliance and regulations such as KYC, AML, and CFT and will be governed by the central bank as well as by other independent middlemen. The direct model which is also called a single tier model. In the single tier

model, the central bank will play a crucial role as the financial body deciding whether an account holder is eligible for using the digital currency, determined only after a detailed authentication process. A simple difference between the two levels is that a single-tier central bank has more control over the whole operation.

10. The Digital Rupee, also known as CBDC (Central Bank Digital Currencies), will have two categories, one being CBDC-R and the other being CBDC-W, where both R and W stand for Retail or General Purpose, and Wholesale respectively. CBDC-W will help financial institutions reduce the transaction costs between the interbank markets, and

CBDC-R will serve as digital cash for buying and trading between the country’s individuals. In short, CBDC-R is for consumers and business organisations, and CBDC-W is for selected financial organisations governed by the country’s experts. “Digital currency can help to fabricate a rapid, reliable, and resilient financial ecosystem that could utilise superlative technologies to their fullest potential. The change will surely benefit our country in terms of reducing functioning costs, making global transactions with lower fees, and establishing a tech-enabled ecosystem.”

The author is the co-founder and director, Yudiz Solutions Ltd.

Also Read: How is technology changing as neo-banks and cryptocurrency plan to co-exist

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First published on: 04-12-2022 at 10:42 IST