Central Bank Digital Currency (CBDC) has finally come to India with the start of the pilot phase of the Digital Rupee rollout from today (November 1, 2022). However, the Reserve Bank of India (RBI) has launched the first pilot of the Digital Rupee for the wholesale segment (e₹-W) only.
Experts believe that CBDC is one of the biggest developments in the financial world, the full impact of which will be visible in near future. India already has a stellar record as an early adopter of technology with the rapid adoption of UPI and QR-based payments across the country. With CBDC, it is expected that India will take giant strides in the world rapidly progressing towards the adoption of digital currencies.
In this article, we take a look at some points you should know about the Digital Rupee rollout and the expected features for retail users in future.
- RBI has not yet launched a Digital Rupee pilot for the retail segment. The central bank will launch the first pilot of the Digital Rupee for the retail segment within a month. It will be launched for closed user groups comprising customers and merchants. RBI will share details in this regard soon.
- The current rollout of the Digital Rupee is meant for the Wholesale segment only. According to RBI, the use of the Digital Rupee in the wholesale segment would make the interbank market more efficient. Moreover, the settlement in central bank money would reduce transaction costs by preempting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.
- In future, RBI plans to launch pilot projects for other wholesale transactions and cross-border payments.
- Banks participating in Digital Rupee – Wholesale segment pilot are 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.
Expected features of Digital Rupee for Retail Users
Digital Rupee (e₹-R) may play a big role in providing a safe and reliable means of payment for direct transfer programs of government welfare programmes. If properly monitored, CBDC will help promote inclusive and innovative payments, according to experts.
With Digital Rupee, efficiency, lower fee requirements, faster settlement, increased transparency and lower privacy would translate to everyday lives slowly but will have both positive and negative externalities.
“CBDCs can play a big role in the government’s push to provide a safe and reliable means of payments for direct benefit transfer programs of government welfare programs. They promote inclusive and innovative payments if properly monitored, and the risks involved are overcome through effective means,” says Manish Sharma, Founding Partner of Centricity Wealth Tech.
If leveraged for government schemes, Digital Rupee would ensure no leakage and automated release of payments on the completion of certain tasks.
FREQUENTLY ASKED QUESTIONS
Will Digital Rupee be useful in retail payments?
“CBDCs can also be used for retail payments. Payment instruments could be made available for payment transactions to be made via CBDC. Retail CBDC distributed by the RBI and commercial banks would have to be held in electronic wallets/ accounts by the end users,” says Sharma.
Digital Rupee would enable payment means between the following:
- Consumer to consumer
- Consumer to business and
- Business to business.
Will Digital Rupee replace physical currency?
Digital Rupee will not replace physical currency. It is meant to complement physical currency.
“Digital currency advocated by the central banks is to complement and not replace the current forms of money and will provide users with an additional way of payment, with the existing payments systems still being in place. The digital rupee ideated by RBI will be generated through an advanced payment system which is affordable, accessible, convenient, efficient, safe, and secure and will further bolster,” says Rachit Chawla, CEO, Finway FSC.
Will Digital Rupee boost lending?
Instant lending to micro, small and medium enterprises (MSMEs) in India can be possible with the help of CBDC. As more MSMEs use CBDC, banks can draw up a more accurate borrower risk profile. This can be used to promptly meet MSME financing requirements. Moreover, the stimulus for MSMEs can also be disbursed quickly from the central bank. This can help businesses grow and sustain themselves during periods of uncertainty where the availability of cash is limited.
Will Digital Rupee transactions be traceable?
Digital Rupee transactions will be traceable. Experts say that CBDC’s traceability may help retail users and MSMEs prove their creditworthiness.
Will Digital Rupee be based on blockchain?
Experts say that the CBDC for retail would likely be on a Distributed Ledger Technology and not necessarily the blockchain.
“There would be a transparent overview of transactions between participants. The automation ability and instant settlement will help speed up the overall financial infrastructure on which retail payments operate,” Arjun Khazanchi, Co-Founder and Chief Legal and Strategy Officer at Rooba.Finance
Will Digital Rupee have private keys like cryptocurrencies?
There are some concerns about the private keys of the Digital Rupee and the risks associated with losing a private key. However, it seems likely that Digital Rupee would not be based on a self-custodial model.
Will Digital Rupee be exchangeable with cash?
Experts expect there would be fungibility of the CBDC with cash for retail. This would make it an opt-in opt-out kind of system.
Will Digital Rupee help in tax collection?
Digital Rupee may make it easy to collect taxes through smart contracts.
“There are also interesting ways for the tax to be collected through smart contracts linked to the CBDC, but there are various other developments in law, policy and education which would be required before a full retail rollout,” says Khazanchi.