India is set to get its first pilot of digital currency — Central Bank Digital Currency (CBDC) – today, i.e. December 1. CBDC has been demarcated into two broad categories- retail and wholesale. While the first pilot of CBDC for the wholesale segment went live on November 1, today what is rolling out is the first pilot of CBDC for the retail users who are the common people.
The Retail CBDC would be potentially available for use by all private sector, non-financial consumers and businesses while wholesale CBDC is designed for restricted access to select financial institutions. While Wholesale CBDC is intended for the settlement of interbank transfers and related wholesale transactions, Retail CBDC will be treated as an electronic version of cash mostly meant for retail transactions. Retail CBDC is expected to provide access to safe money for payment and settlement as it is a direct liability of the Central Bank.
The Reserve Bank of India (RBI) will initially conduct the pilot run to test the robustness of the entire digital rupee management and take notes of any errors, if any, so that they are avoided in the next pilot run.
To answer how the digital rupee will work, digital rupee or the e?-R will be digital token that are exchangeable at par with existing currency. It will be issued in the same denominations that paper currency and coins are currently issued by the bank. It will be distributed through banks that will act as intermediaries. Users will be able to transact with e?-R through a digital wallet offered by these banks that needs to be stored on mobile phones or devices. The transactions can be both Person to Person (P2P) and Person to Merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations just like the digital wallet transactions we make.
While the first pilot run of retail CBDC is going live today, it isn’t coming for all at this moment. RBI will run the first pilot run only in select cities – Mumbai, New Delhi, Bengaluru and Bhubaneswar. It will be later extended to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla.
The first phase will begin with four banks- State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank across four cities of the country. Four more banks- Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank will join this pilot subsequently. The reason why not everyone will be able to access the digital rupee is because RBI will initially conduct this pilot run amongst a close user group (CUG) comprising participating customers and merchants.
CBDC- a digital form of currency- was first proposed by the RBI in 2017. It can be called an official cryptocurrency which is regulated by the bank. By launching digital rupee, the government hopes to address problems related to existing fiat currency and cross border transactions.