E-Rupee

1. Context 

2. RBI's plan

• The central bank said that the development of CBDC could provide the public with a risk-free virtual currency that will give them legitimate benefits without the risk of dealing in private virtual currencies.
• The approach to the issuance of CBDC will be governed by two basic considerations to create a digital rupee that is as close as possible to a paper currency and to manage the process of introducing the digital rupee seamlessly.
• The Central bank also feels CBDCs should have offline capabilities to make them more attractive and accessible payment mediums for a wide category of users.

3. E-rupee

• E-rupee is the same as fiat currency and is exchangeable one-to-one with the fiat currency.
• Only its form is different. It can be accepted as a medium of payment, legal tender and a safe store of value.
• The digital rupee would appear as a liability on a central bank's balance sheet.

4. Types of e-rupee

1. general purpose (Retail) (CBDC-R) and
2. wholesale (CBDC-W).

4.1 Retail CBDC

• It is an electronic version of cash primarily meant for retail transactions.

• The RBI has not explained how the e-rupee can be used in merchant transactions in the retail trade.

4.2 Wholesale CBDC

• It is designed for restricted access to select financial institutions.

5. Forms of CBDC

5.1 Token-Based

• A token-based CBDC would be a bearer instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them.
• In a token-based CBDC, the Person receiving a token will verify that his ownership of the token is genuine.
• A token-based CBDC is viewed as the preferred mode for CBDC-R as it would be closer to physical cash.

5.2 Account-Based 

• An account-based system would require maintenance of the record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances.
• In this case, an intermediary will verify the identity of an account holder.
• This system can be considered for CBDC-W.

6. The model for issuance

6.1 Direct model

6.2 Indirect model 

• It would be one where the central bank and other intermediaries (banks and other service providers) play their respective roles.
• In this model, the Central bank will issue CBDC to consumers indirectly through intermediaries and any claim by consumers will be managed by the intermediary.

• The RBI said the key motivations for exploring the issuance of CBDC in India among others include a reduction in operational costs involved in physical cash management, fostering financial inclusion, and bringing resilience, efficiency and innovation to the payments system.
• It will add efficiency to the settlement system and boost innovation in the cross-border payments space and provide the public with uses that any private virtual currency can provide, without the associated risks.

8. Transacted in offline mode

• The offline functionality as an option will allow CBDC to be transacted without the internet and thus enable access in regions with poor or no internet connectivity.
• It will also create digital footprints of the unbanked population in the financial system, which will facilitate the easy availability of credit to them.
• The RBI feels in the offline mode, the risk of "double-Spending" will exist because it will be technically possible to use a CBDC unit more than once without updating the common ledger of CBDC.
• But it can be mitigated to a larger extent by technical solutions and appropriate business rules including monetary limits on offline transactions.

For Prelims & Mains