The Reserve Bank of India (RBI) has stated that on December 1st, it would launch the first pilot for its retail digital rupee, marking the first move toward the implementation of a commercial virtual rupee or retail central bank of digital currency or retail CBDC. The explanation sheds light on the basics of CBDC and the RBI's test program for the industry at large.

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While the actual launch of the digital Rupee has not been given a specific date as of yet, it will likely take more time. The RBI's goal with the pilot is to initially assess the feasibility of creating, distributing, and using digital rupees at retail. Following the success of this pilot, other pilots will be conducted to try out various aspects and use cases of the e-Rupee token and underlying structure.

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Two types of currency are produced by the central bank. To begin, there is wholesale funding, which is utilized primarily by financial institutions in interbank transactions. Reserves is the common name for wholesale currency. The next is what is known as "retail money," or money utilized in everyday transactions. Cash is the common name for money used in retail transactions. There is no more reliable method of payment than either wholesale or retail money, as both are essentially liabilities of the central bank. The initiative, which will be implemented in two stages, will include eight institutions selected by the central bank. State Bank of India (SBI), ICICI Bank, Yes Bank, and IDFC First Bank are the initial 4 participants. Bombay, Delhi, Bangalore, and Bhubaneswar will be the four locations where the digital rupee may be purchased at retail. Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank will all be joining the initiative in its second phase. In concert, they would increase the pilot program's reach to a total of nine more locations throughout India: Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Cochin, Lucknow, Patna, as well as Shimla.

Digital Rupee vs Cryptocurrency

It's true that some people confuse digital rupee with virtual currencies, however there is really no correlation between the two. While Cryptocurrencies like bitcoin and Ethereum use Blockchain technology, digital Rupees use a different kind of virtual currency which is recognized as legitimate money. The e-Rupee, India's virtual money, is distributed in the exact quantities as paper cash as well as tokens, apart from Cryptos. While Bitcoin and other Cryptocurrencies see wild price swings, the value of the digital Rupee stays stable. Virtual Rupees are assigned to consumers by banks, unlike Cryptocurrency, which anyone may invest in. The method used to provide digital Rupee to clients is yet unknown.

A select number of clients and retailers will be members of a restricted user group formed by the central bank and its associate institutions. Tokens representing the digital rupee will be released by the banks to the user community in the same denominations that paper cash as well as tokens are today. In addition, the central bank has said that the retail virtual rupees offering would provide the same "confidence, safety, and settlement finality" as physical currency. The virtual rupees may be exchanged for other currencies or deposited into a bank account much like regular currency. Individuals will be able to retain and spend their digital rupee tokens in a digital wallet provided by one of the participating institutions. Thus, it will function similarly to existing mobile wallets, albeit the central bank's obligation for digital rupees will be reflected in the books.

How to Use Digital Rupee?

Digital Rupee will be accepted at most local retailers, allowing customers to make purchases at their convenience. Both consumer and business-to-merchant transactions may be conducted using digital Rupee. As an electronic alternative to real currency, the e-Rupee will provide the same assurances of security as well as closure in financial transactions as traditional cash. It functions similarly to currency in that it may be exchanged for other types of currency such as bank deposits but does not accrue interests. The Reserve Bank of India has said that financial institutions such as banks would act as middlemen in the transfer of digital Rupee from the RBI to consumers and businesses. The ability for banks to create digital money of particular denominations, which will then appear in the bank's wallet. The bank will provide virtual cash to the consumer after they have deposited funds. Digital Rupee access has not been detailed by any of the other partner banks. The Reserve Bank of India has already made it clear that e-Rupee transactions would be possible using digital wallets provided by qualified banks and kept on customers' mobile devices. Similar to how internet purchases are made, customers will be able to make e-Rupee purchases at brick-and-mortar stores by scanning QR codes displayed there.

Central Bank of Digital Currency (CBDC)

Nirmala Sitharaman, India's Minister of Finance, advocated the creation of a CBDC in her Financial Year 2023 budget address. She claims that a CBDC would help the virtual industry tremendously, as well as result in a more streamlined as well as affordable method of managing cash. As a result, in 2022-23, the RBI will issue a CBDC "using blockchain as well as other innovations. Taking into account the current international climate, in which a number of governments are making moves towards granting CBDCs, Sitharaman expressed this recommendation.  As of this writing, a CBDC has been adopted by the central banks of both the Bahamas and Nigeria. Similar to the Reserve Bank of India's current efforts, the Chinese central bank has already completed pilot tests of issuing a CBDC for use in the retail sector.

Disclaimer: The author’s thoughts and comments are solely for educational reasons and informative purposes only. They do not represent financial, investment, or other advice.