E-RUPEE

1. Context 

2. Digital Rupee

• It is a legal tender issued by the RBI in digital form.
• It is the same as the fiat currency and is exchangeable one-to-one with the fiat currency.
• Only its form is different it is not paper (or Polymer) like physical cash.
• It is a fungible legal tender for which holders need not have a bank account.
• CBDC will appear as a liability (currency in circulation) on the RBI's balance sheet.

• A token CBDC is a bearer instrument like a banknote, meaning whoever "holds" the tokens at a given point in time will be presumed to own them.

3. Introducing the Digital Rupee

• The pilot launched on Thursday will initially cover four cities-Mumbai, New Delhi, Bengaluru and Bhubaneswar and will be later extended to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla.
• The Pilot will work in a closed user group (CUG) comprising participating customers and merchants.
• Selected customers from the selected cities will get CBDC wallets with notes printed digitally with the RBI Governor's signature.
• Eight banks will participate in the Pilot pilot the State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in the first phase in the first four cities and subsequently, Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank.
• The scope of the pilot may be expanded gradually to cover more banks, users and locations.

4. Individuals use the e-rupee

• E-rupees will be issued in the same denominations as paper currency and coins and will be distributed through the intermediaries, that is banks, Transactions will be through a digital wallet offered by the participating banks and stored on mobile phones and devices.
• Transactions can be both person-to-person (P2P) and Person-to-merchant (P2M).
• For P2M transactions (Such as shopping), there will be QR codes at the merchant location.
• A user will be able to withdraw digital tokens from banks in the same way she will be able to keep her digital tokens in the wallet and spend them online or in person or transfer them via an app.

5. Different from other wallets

• Not very different in terms of how it will be used. However, UPI-based apps like Google Pay and Paytm have a daily and per-transaction spending limit.
• The RBI has not fixed any limit on holding digital rupees in wallets.
• Digital rupee transactions above Rs 2 lakh are likely to be reported for tax matters.

6. Types of e-rupee

6.1 Retail e-rupee 

6.2 Wholesale CBDC

• Wholesale CBDC is designed for restricted access to select financial institutions.
• It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment and inter-bank market and make the capital market more efficient and secure in terms of operational costs, use of collateral and liquidity management.

7. Need to introduce the e-rupee

• Leveraging blockchain technology for the e-rupee is a stepping stone for India to become a $1 trillion digital economy.
• India is witnessing massive growth in digital transactions the volume and value of UPI transactions increased by 118 per cent and more that 98 per cent respectively in Q2 2022 compared to Q2 2021.
• The digital rupee based on transparent and efficient technology will provide customers with continuous access to the payment system, whether wholesale or retail.

8. CBDC differ from Cryptocurrency

• Being backed by the RBI, the e-rupee is not comparable to private virtual currencies like Bitcoin which have mushroomed over the last decade.
• Private virtual currencies sit at substantial odds with the historical concept of money.
• They are not commodities or claims on commodities as they have no intrinsic value: claims that they are akin to gold seem opportunistic.
• Usually, certainly for the most popular ones now, they do not represent any person's debt or liabilities. 
• There is no issuer. They are not money certainly not currency as the word has come to be understood historically.

9. Benefits of e-rupee

• CBDC has the potential to provide significant benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs and reduced settlement risk.
• To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced.
• The digital rupee has some clear advantages over other digital payment systems: Payments are final and thus reduce settlement risk in the financial system.
• When CBDC is transacted instead of bank balances, the need for interbank settlement disappears. 
• It can also enable more real-time and cost-effective globalisation of payment systems.

10. Offline transactions 

• The offline functionality will allow CBDC transactions in regions with poor or no Internet connectivity and create digital footprints of the unbanked population in the financial system, the RBI feels that a risk of "double spending" exists in offline mode because it will be technically possible to use a CBDC unit more than once without updating the common ledger.
• The RBI has said this can be mitigated to a large extent by technical solutions and appropriate business rules including a monetary limit on offline transactions.

11. Is it vulnerable to cyber-attacks?

• The CBDC ecosystems may be at similar risk for cyber-attacks as existing payment systems.
• Cybersecurity considerations will need to be taken care of both for the item and the environment.

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