Context: Fintech major CRED has launched a beta version of its e-rupee (e₹) wallet, becoming the first fintech to integrate RBI’s central bank digital currency.
Relevance of the Topic: Prelims: Central Bank Digital Currency
Central Bank Digital Currency (CBDC)
- CBDC is a form of digital currency issued by a country's central bank.
- It is similar to cryptocurrencies, except that its value is fixed by the centralbank and is equivalent to the country's fiat currency.
- Fiat money is a government-issued currency that has no physical commodity like gold or silver backing it up.
- It is considered a form of legal tender that can be exchanged for goods and services.
Types of CBDCs:
There are two types of CBDCs: wholesale and retail.
- Wholesale CBDCs:
- Financial institutions are the primary users of wholesale CBDCs.
- Wholesale CBDCs function similarly to holding reserves in a central bank.
- The central bank grants an institution an account in which to deposit funds or to use to settle interbank transfers.
- Central banks can then use monetary policy tools, such as reserve requirements or interest on reserve balances, to set interest rates and influence lending.
- Retail CBDCs:
- Retail CBDCs are government-backed digital currencies used by consumers and businesses.
- Retail CBDCs eliminate intermediary risk—the risk that private digital currency issuers might become bankrupt and lose customers' assets.
- Two types of retail CBDCs: They differ in how individual users access and use their currency:
- Token-based retail CBDCs are accessible with private keys, public keys, or both. This method of validation allows users to execute transactions anonymously.
- Account-based retail CBDCs require digital identification to access an account.
e-Rupee in India:
- India has introduced the e-Rupee, a form of digital currency, through the Reserve Bank of India (RBI).
- Aims:
- modernise the financial infrastructure
- ensure financial inclusion
- reduce transaction costs.
- The digital currency was initially rolled out in phases, with pilot projects for wholesale and retail use in 2022 and 2023.
- The e-Rupee seeks to integrate with India’s existing digital payment systems, providing a reliable, government-backed alternative to cash for everyday transactions.
CRED’s e-Rupee wallet
- The fintech company CRED launched a beta version of its e-rupee (e₹) wallet.
- This makes CRED the 1st fintech to integrate RBI’s CBDC.
- This development is part of a broader initiative by the RBI to enhance access to CBDC-Retail and expand user choices.
- Details of CRED’s e-Rupee Wallet:
- It allows users to transact up to ₹10,000 per transfer.
- Daily transaction limit of ₹50,000.
- Users can store up to ₹1 lakh in their wallets.
- It supports zero-cost merchant transactions, making it appealing for both consumers and merchants.
- Sponsor Bank: Yes Bank serves as the first sponsor bank for the e-rupee wallet. It facilitates the issuance of CBDC tokens from the RBI to CRED.
- Future Enhancements:
- Future updates for the e-rupee wallet are expected to introduce programmable merchant payments.
- This includes integration with CRED Pay and PIN-less transactions for amounts below ₹500.
Significance of CBDCs
- Security: CBDCs offer greater security compared to physical currency, as they are resistant to counterfeiting and fraud, with transactions being traceable.
- Eliminating Third-Party Risk: CBDCs can reduce risks associated with events like bank failures or bank runs.
- Enhanced Monetary Policy: With direct control over the digital currency, central banks can more effectively implement monetary policy, such as controlling inflation and managing interest rates.
- Financial Inclusion: By providing access to digital money, CBDCs can bring unbanked populations into the formal financial system.
- Reduced Transaction Costs: CBDCs can lower the costs of transactions by eliminating intermediaries, thus making payments more efficient and affordable.
- Direct Consumer-Central Bank Connection: CBDCs can establish a direct connection between consumers and central banks, eliminating the need for costly intermediary infrastructure and improving the efficiency of payment systems.
- Lower Cross-Border Transaction Costs: By simplifying the distribution systems and fostering greater cooperation between jurisdictions, CBDCs can lower the high costs of cross-border transactions.
Challenges with CBDCs
- Impact on Banking System: Widespread adoption of CBDCs could disrupt traditional banking models, potentially reducing the role of commercial banks in credit distribution.
- Privacy Concerns: Digital nature of CBDCs makes it easier for governments to track and monitor transactions, raising concerns about user privacy and surveillance.
- Cyber Security: With increased reliance on digital systems, CBDCs are susceptible to cyber-attacks.
- Infrastructure and Accessibility: Implementing a CBDC system requires significant digital technological infrastructure, which could be a challenge for developing nations with limited digital infrastructure.