Explore India’s CBDC and e-Rupee, their benefits, pilot programs, and their transformative role in modernizing the economy.
What are CBDC and e-Rupee?
CBDC, or Central Bank Digital Currency, is a digital form of a country’s official currency, issued and regulated by its central bank. This digital currency holds the same legal tender status as physical tangible money, backed by the Reserve Bank of India (RBI). Their presence is recognized only digitally, residing in centralized CBDC wallets controlled by blockchain technology.
In India’s case, the CBDC is called the e-Rupee, existing electronically instead of physical notes and coins. It is a core component of India’s transition to a cashless system and a critical step in the evolution of the digital payment infrastructure.
Benefits of CBDC Deployment:
1. Increased Financial Inclusion
CBDCs can boost financial inclusion by offering digital services to unbanked populations. To expand access, the RBI permits non-bank payment operators to offer CBDC wallets and is testing offline payments for areas with limited internet. These pilot programs underscore a commitment to broader accessibility and economic stability.
2. Faster and Cheaper Transactions
CBDCs enable faster and more efficient transactions by reducing settlement times and the need for intermediaries, facilitating near-instant peer-to-peer transfers and person-merchant transactions. This improves the overall efficiency of the financial system.
3. Reduced Costs for the Central Bank
Printing and circulating physical tangible money costs about 2% of the government’s annual financial budget. CBDCs can potentially lower these costs and help reduce the need for intermediaries in payment systems.
4. Enhanced Security and Privacy
CBDCs offer secure, private digital currency transactions, reducing fraud and identity theft. The use of blockchain technology enhances transparency, trust, and tamper-proof processing, helping combat financial crime.
5. Improved Monetary Policy Effectiveness
CBDCs provide real-time data, enabling more accurate and targeted monetary policy. Pilot programs offer insights into spending patterns, helping central banks like the RBI formulate effective economic strategies.
6. Facilitation of Cross-Border Transactions
Digitally backed currency facilitates cross-border payments by reducing conversion costs and eliminating multiple intermediaries. Crossborder transactions using CBDCs are being tested in collaborations like the India-UAE partnership.
7. Programmable Payments
CBDCs allow for programmable payments using smart contracts to ensure money is spent only on designated purposes. For example, subsidies issued via CBDC could be used exclusively for agricultural inputs, ensuring effective use of government funds.
Overall, Central Bank Digital Currency has the potential to modernize India’s financial system, support economic growth, and improve governance by increasing financial inclusion, streamlining digital transactions, and supporting better policymaking.
Current Pilot and Proposed Advancements:
India’s CBDC pilot program, currently in its retail CBDC phase (CBDC-R), supports peer-peer transfers and person-merchant transactions using digital rupee wallets offered by participating banks.
Upcoming Features:
- Programmability: Allows entities like government agencies to earmark funds for specific use cases, such as travel reimbursements or welfare schemes.
- Offline Functionality: Enables offline payments even in remote areas, extending digital currency access beyond internet zones.
The Reserve Bank of India (RBI) has also initiated pilots in the wholesale sector. CBDCs in India can be used for crossborder payments, online shopping, and peer-to-peer transfers.
To use e-Rupee, individuals need a CBDC wallet linked to their bank account. Once obtained, these digital rupees can be spent on goods and services at designated merchants but cannot be exchanged back for physical tangible money.
The use of digital currency in India aims to:
- Promote a cashless system
- Increase financial inclusion
- Combat money laundering
- Improve monetary policy using real-time data
Use Cases of CBDC in the Indian Context
1. Wholesale CBDC Pilot for Interbank Lending
The RBI launched a wholesale CBDC pilot for interbank money markets, allowing programmable payments and atomic settlements.
2. Retail CBDC for the Public
Retail CBDC is intended for everyday use, supporting peer transfers, offline payments, and transactions through the digital payment system.
3. Cross-Border Payments with UAE
India is exploring crossborder payments with the UAE using CBDCs to enhance international transaction efficiency.
4. Tokenization and Collateralization
CBDCs could enable digital tokenization of collateral for loans, increasing efficiency and reducing risk in financial markets.
5. Enhancing Merchant Acceptance
The merchant ecosystem is being developed to promote person-merchant transactions and expand the reach of digital currency in a cashless economy.
CBDCs promise to revolutionize the future of digital finance in India. The only barriers remain in bridging the digital divide and overcoming financial illiteracy, both essential for equitable access and trust.
How a Top Indian Bank Deployed CBDC with Dice
