Central Bank Digital Currency

RBI has commenced pilot launches of Digital Rupee (e₹) for specific use cases. First in October 2022, RBI launched first pilot in the Digital Rupee – Wholesale segment (e₹-W) and later operationalised first pilot for Digital Rupee – retail segment (e₹-R)

CBDC – Retail (e₹-R)

• Retail Digital Rupee would cover select locations in closed user groups comprising participating customers and merchants. 
• e₹-R would be in the form of a digital token that represents a legal tender. It would be issued in the same denominations that paper currency and coins are currently issued. 
• It would be distributed through intermediaries i.e., banks and users will be able to transact with e₹-R through a digital wallet offered by participating banks and stored on mobile phones/devices. Transactions can be both Person-to-Person and Person-to-Merchant.
• Payments to merchants can be made using QR codes displayed at merchant locations.
• As in the case of cash, CBDC-Retail will not earn any interest and can be converted to other forms of money, like deposits with banks.
• The e₹-R would offer features of physical cash like trust, safety and settlement finality. 
• Eight banks have been identified by RBI for participation in this pilot. The pilot would initially cover 4 cities: Mumbai, Delhi, Bengaluru and Bhubaneswar and will be later extended in a phase wise manner to other cities, banks and features of e₹-R.

CBDC-Wholesale (e₹-W)

• Pilot e₹-W will be used for settlement of secondary market transactions in government securities.
• Use of Wholesale Digital Rupee is expected to make the inter-bank market more efficient. Settlement in e₹-W would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. 
• Learnings from this pilot would help RBI to extend the use cases of e₹-W for other wholesale transactions and cross border payments. 
• Nine banks have been authorised by RBI to participate in this pilot. 

Details about CBDC

• Digital currency backed by the Central bank of a country. Just like currency notes issued by the Central
• Bank, the CDBC is a legal tender and accepted for the payment of various transactions within a country.
• Unlike the cryptocurrencies, the CBDC is backed by the Central Bank and hence enjoys more stability and less volatility.
• Also called as "Programmable money" as it can be programmed for certain selected users or within
• specific region of a country.
• CBDC appears as a liability on the RBI’s balance sheet.
• Legality of CBDC: Finance Act 2022 has amended the RBI Act, enabling it to introduce Central Bank Digital Currency. The definition of bank note was amended wherein RBI was allowed to issue both physical and digital currency by amending section 2 of RBI Act, 1934.

Types of CBDC

• Retail CBDC: CBDC that can be used for people for day-to-day transactions.
• Wholesale CBDC: CBDC that can be used only by financial institutions such as Banks, NBFCs etc.

Benefits of CBDC

• Reduction is cost associated with physical cash management. Issuance of CBDC is expected to have significant savings in security printing (seigniorage costs).
• Further the cause of digitalisation to achieve a less cash economy.
• Supporting competition, efficiency and innovation in payments.
• Use of CBDC will lead to improvements in cross-border payments.
• Lead to financial inclusion.
• Safeguard trust of common man in the national currency vis-à-vis proliferation of crypto assets.
• Transparency, privacy and finality of payments.