• India launched its Central Bank Digital Currency (CBDC)or digital rupee or e-rupee on December 1, 2022. It is an electronic version of cash and will be primarily meant for retail transactions. The pilot will initially cover the four cities of Mumbai, New Delhi, Bengaluru, and Bhubaneswar.
• This makes it important to know what CBDCs are,how they are different from cryptocurrencies and UPI transactions, and also about the safety concerns associated with it.

CBDC or E-rupee

• It is a legal tenderissued by the RBI in digital form. It is the same as the fiat currency and is exchangeable one-to-one with the fiat currency.
• E-rupee will be in the form of a digital token representing a claimon the central bank and will effectively function as the digital equivalent of a banknote that can be transferred electronically from one holder to another.
• Based on usage and the functions performed by the digital rupee, and considering different levels of accessibility, theRBI has demarcated the digital rupee into two categories:
  • Retail E-rupee:It is an electronic version of cash primarily meant for retail transactions, which can potentially be used by almost everyone, and can provide access to safe money for payment and settlements.
  • Wholesale CBDC:It is designed for restricted access to select financial institutions.
    • Financial transactions involving government securities (G-Sec)and interbank transactions could be transformed by this technology.
    • It also makes the capital market more efficient and secure in terms of operational costs, use of collateral, and liquidity management.

E-rupee Circulation in the Market

• 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.
• Users will be able towithdraw digital tokens from banks in the same way they can currently withdraw physical cash.
  • They will be able to keep their digital tokens in the wallet,and spend them online or in person, or transfer them via an app.

Difference between Digital rupee and cryptocurrency

• Since the digital rupee is not a physical good or virtual asset, unlike cryptocurrencies, there can be no direct comparison between the CBDC (Central Bank Digital Currency) and them. Cryptocurrency coins are also not quite money.
• Similar to the paper banknotes that central banks like the RBI issue, this digital rupee can be converted into cash. The CBDC, which will perform the same function as banknotes but is not a decentralised asset like cryptocurrencies, will continue to be issued by the RBI.
• A country''s fiat currency is known as its central bank digital currency (CBDC), whereas cryptocurrencies are an alternative payment method with their own proprietary algorithm. The crypto currencies are digital assets in a decentralised network, and the digital currencies can be referred to as the nation''s digital fiat. The value of a crypto currency, on the other hand, is independent of central banking authorities and follows a transparent process from mining to ownership to transfer of assets, in contrast to digital currencies, which are completely regulated by the central bank and the government, who set the currency''s value.

Pros of E-rupee

• Reducing Dependency on Dollar:India can establish Digital Rupee as a superior currency for trade with its strategic partners, thus reducing reliance on the dollar.
  • This occurs at a time whenIndia is already in talks with Russia, UAE and Saudi Arabia to allow settlement of trade in the Indian rupee.
• Cutting Cost of Maintaining Physical Currency:CBDC has the potential to reduce dependency on cash. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced.
• Regulated Intermediation:Along with reducing operational costs, it will offer the public the same features as any private virtual currency (cryptocurrency) without any risks associated with it.
  • Unlike crypto, E-rupee has regulated intermediation and control arrangementsthat plays the crucial role of ensuring integrity and stability of the monetary and financial ecosystem.
• Globalisation of Payment System:CBDC can also enable a more real-time and cost-effective globalisation of payment systems. It could eliminate the need for an expensive network of correspondent banks to settle cross-border payments.
  • ForIndians working abroad, sending money home will become simpler and cheaper resulting in huge savings for India, the world’s top recipient of remittances.

Challenges Associated with E-Rupee

• Privacy and Security Concern:E-rupee has the capacity to accumulate sensitive user and payment data on a massive scale. In the wrong hands, this data can be easily used to spy on the private transactions of citizens.
  • If implemented without proper security protocols, an E-Rupee could substantially amplify the scope and scale of many of the security and privacy threatsthat already exist in today’s financial system.
• Digital Divide and Financial Illiteracy:High level of digital illiteracy is the biggest challenge and hindrance in the success of E-rupee in India. India had a rank of 73 out of 120 countries for internet literacy (2021).
  • Also, digital services are not available in local languages,which is a major barrier to financial literacy.
• Acceptability Concern:Traceability of e-rupee transactions could become a deterrent to its uptake in India where cash transactions are still hugely popular, largely because of their anonymity. According to government data, the volume of bank notes in circulation rose 5% in fiscal year 2022.

Looking ahead

• Secured Digital Environment:India’s regulatory systems need to catch the evolving risks of data privacy and guide banking institutions to place appropriate safeguards and cushions to avoid any personal data breach.
• Strict KYC Norms:A digital rupee may well be a boon but there is a need to enforce strict compliance of Know Your Customer (KYC) norms to prevent the digital currency’s use for terror financing or money laundering.
  • Also, given India’s still-vast digital divide, a protocol for offline use has to be worked out.