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The Reserve Bank of India (RBI) has launched a pilot program (a small-scale implementation of a project to understand the credibility of an idea) for the digital rupee, commonly dubbed as the ‘E-Rupee’ in four major cities of India from the beginning of this month.
The RBI has launched the first pilot for the Central Bank Digital Currency (CBDC) in four locations: Mumbai, New Delhi, Bengaluru, and Bhubaneswar with the intent to launch it in Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla at a later date. Four significant banks were chosen to be in the first phase of the pilot: SBI, ICICI Bank, Yes Bank, and IDFC First Bank, while four other banks were selected for the second phase: Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank, set to get on-board in the next 2-3 weeks.
The central bank is floating digital currency worth around Rs 1.71 crores and issuing the same to the banks chosen for the first phase. But what is CBDC?
According to the RBI, the CBDC is a different form of central bank money from actual cash or reserve/settlement accounts which can be used as a store of value and a medium of exchange. The rupee digital currency will be the same as the paper currency in terms of denominations but will have the form of digital tokens.
This currency is the country’s next step toward creating a safer, more affordable, and easier payment system. Reduction in operating costs relating to the printing, storage, transportation, and replacement of banknotes & globalization of payments are added benefits of digital currency. Here, unlike UPI where payments are processed between two banks, transactions will be processed between two digital wallets.
However, risks similar to that of cryptocurrencies exist for CBDC. Privacy and Security concerns are the greatest since cryptocurrency wallets have been hacked previously. Moreover, the acceptability of legal tender is an issue in our country. With lower rates of digital literacy and heavy reliance on cash transactions, the acceptance of digital currency appears difficult.
Even though people are skeptical of the currency and have openly spoken against it, there are several who speak in support of it as well. "While many have been critical of #CBDC, we might be missing the big picture, remittances, unbanked economy, and reducing subsidy leakage, to name a few. When anything new comes into the market, the old need to adapt and the new need to regulate the change". Said Zerodha founder, Nikhil Kamath.
Since the project is in its testing phase, the RBI will be able to deduce the shortcomings, if any, and make arrangements accordingly to ensure a smooth transition towards a cashless society.
