Know your digital rupee

It is expected to be used for payments and transactions once the pilot projects are run successfully
Representational Image
Representational Image File/GK

Integration of technology is progressing at a faster pace and its revolutionary adoption in the world of banking is amazing. Today most of the banking transactions of any volume or nature are done through digital mode without the  physical interaction of customers and the banks. In fact, the banking services are available in real time, courtesy the power of technology. 

Precisely, digital banking is now the order of the day. In this digital revolution, it is the cash which is fast losing the tagline - cash is the king. The volume of digital transactions done in online mode is gaining traction and recording new highs every day. The strength of the digital transactions lies in retail transactions where even a street vendor prefers small financial transactions in online mode. 

India’s payment system witnessed dramatic developments when Covid-19 pandemic compelled to bank upon digital mode of financial transactions. During the last two years of pandemic, millions of consumers first time boarded the digital payment system and are mostly banking upon the digital mode for their routine financial transactions. 

In this ongoing revolution of digital transactions, the concept of digital currency saw light of the day. even as the concept of having a central bank digital currency was conceived many years back, the necessary push to realize the dream of having digital currency was lacking till the onset of the COVID-19 pandemic. All of us know well how the pandemic changed the way of life and forced the businesses, especially the banks world over, to go digital in their operations in a dynamic way.

Let us have a look at the introduction of the central banking digital currency (CBDC). The Reserve Bank of India (RBI) recently launched the first pilot of retail digital Rupee within a closed group comprising participating customers and merchants. The digital rupee is in the form of a digital token representing legal tender.

Currently, the apex bank is testing the robustness of the entire process of digital rupee creation, distribution and retail usage in real-time. It is expected to be used for payments and transactions once the pilot projects are run successfully.

Meanwhile, the launch of the digital rupee (e-rupee) has created a buzz and everyone seems to be curious to know at least its mechanism of usage. The Reserve Bank of India (RBI) announced the launch of the first retail digital Rupee pilot on December 1, 2022.

What is the retail pilot of the e-rupee all about? 

According to the RBI the pilot will assess the stability of the complete creation, distribution, and retail use of digital rupees in real time. Based on the lessons learned from this pilot, other aspects and uses of the e-rupee token and architecture will be evaluated in further pilots.

Eight banks have been identified for phase-wise participation in this pilot. The first phase has begun with four banks - State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities across the country. Four more banks, Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank will join this pilot subsequently.

The pilot would initially cover Mumbai, New Delhi, Bengaluru and Bhubaneswar and later extend to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla. The scope of pilot may be expanded gradually to include more banks, users and locations as needed, says the RBI.

What is the basic structure of e-rupee and how to own it? 

According to an official statement, the e-rupee or digital rupee is in the form of a digital token representing legal tender. It is being issued in the same denominations as the paper currency and coins. Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). It can be used to make payments using QR codes displayed at merchant locations. It has features of physical cash like trust, safety and settlement finality and can be converted to other forms of money, like deposits with banks.

The e-rupee would be distributed through banks. You need to have a digital wallet to make use of e-rupees in financial transactions. The digital wallet will be offered by banks.

It is also worth mentioning that the amount you own in digital rupee won’t earn you any interest like deposits in a savings account. As explained by the authorities, the digital rupee is like a digital version of physical cash, issued as digital tokens in the same denominations as paper currency notes. Notably, the digital wallet doesn’t interest on its own, the digital rupee also won’t earn any interest as it is to be kept in a digital wallet.

Notably, you do not need to have a bank account because it is fungible legal money.

Does that mean e-rupee cannot be used to invest in term deposits of banks?

The digital rupee cannot be used to deposit in fixed deposits of banks. As already stated, you won’t get interest in this kind of digital currency. However, if reports are to be believed, you may be able to earn interest on the digital rupee in future. The government has indicated that it may be converted into other forms of money like deposits with banks in future.

What is the mechanism to conduct transactions using e-rupee?

Firstly, you have to register to use the e-Rupee wallet. The e-rupee wallet will be like a physical wallet but in electronic form on your phone.Once the registration is done, you have to load money into the wallet. The process to load money into your wallet is easy and instant. Banks typically offer two options to load money into the wallet — a) from the account linked to the bank or b) from various UPI apps.

The digital wallet will have currency in the form of tokens. The backend technology will be a blockchain-based centralised platform created by RBI provided to banks for storing and transferring the digital currency among various customer wallets.The settlement, tracking, and ledger maintenance would be done on a real-time basis.

Notably,denominations in the e-rupee have been set at par with the current physical currency denominations. For example, you have Rs 50 denomination available in your digital wallet. For instance, you want to purchase an item worth Rs 35 from a merchant. You will enter Rs 35 in the amount field while paying via digital rupee and the remaining amount of Rs 15 will be automatically stored in your wallet.

You can use e-rupee to send money to another person or merchant. Merchant payments can be facilitated through QR codes at merchant locations.

(Inputs from experts acknowledged)

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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