The Reserve Bank of India (RBI) unveiled its plans for a Digital Rupee (e₹) through a series of press releases in October and November 2022. On October 7, 2022; the RBI issued a Conceptual Note on the Central Bank Digital Currency (CBDC). Subsequently, on October 31, 2022; the Central Bank announced the initiation of the first pilot for Digital Rupee in the Wholesale segment (e₹-W), targeting the settlement of secondary market transactions in government securities. Nine banks were identified for participation in this phase. Following this, on November 29, 2022; the RBI revealed plans for the first pilot in the Retail segment (e₹-R), scheduled to launch on December 1, 2022, covering specific locations in a closed user group of customers and merchants. The e₹-R, distributed in the form of a digital token through banks, would undergo testing in a phased approach involving eight banks across various cities.
On December 1, 2022, the RBI ushered in a new era in the country's financial history with the launch of e₹, India's official CBDC. This groundbreaking move positions India at the forefront of global financial innovation, embracing the transformative potential of digital currencies to reshape traditional banking systems.
e₹, as a CBDC, is a digital representation of the Indian Rupee, the national currency. Unlike cryptocurrencies such as Bitcoin or Ethereum, e₹ is issued and regulated by the RBI, making them a legal and centralized form of digital currency. The introduction of e₹ is part of a broader global trend, as Central Banks worldwide explore the adoption of digital currencies to modernize financial systems.
India's digital payment landscape has evolved significantly with the establishment of various systems such as National Electronic Funds Transfer (NEFT), Real-Time Gross Settlement (RTGS), Immediate Payment Service (IMPS), and Unified Payment Interface (UPI), providing efficient online payment solutions with minimal transaction costs. Despite these advancements, RBI recognizes the need for exploring CBDCs for several reasons as discussed below.
One primary reason for the introduction of CBDCs in India is the objective of minimizing the use of physical cash and the associated management expenses. The RBI acknowledges that cash remains a preferred mode for routine and small-value transactions. Redirecting this preference to CBDCs, while ensuring reasonable user anonymity, is seen as a strategy to expedite the country's transition toward a 'less-cash economy'. The anticipated benefits include a reduction in the significant costs related to physical cash management, encompassing secure printing, storage, transportation, and banknote replacement. Despite the upfront costs of CBDC establishment, the expectation is that operating costs will be lower in the long run, coupled with the perceived environmental friendliness of CBDCs.
Another key factor driving CBDCs implementation in India is the promotion of financial inclusion. CBDCs are envisioned to eliminate the necessity for a traditional bank account to access and utilize this digital currency. Additionally, the consideration of offline transactions (peer-to-peer) is a strategic feature in the design of CBDCs, aiming to foster financial inclusion, especially among the unbanked population residing in remote areas. This accessibility is anticipated to empower individuals to engage in digital transactions and leave digital footprints in the financial system, potentially easing their access to credit facilities.
The introduction of CBDCs is not solely focused on domestic transactions; it also seeks to facilitate cross-border transactions. Collaboration with other Central Banks is proposed as a means to harness new technology and innovations, particularly advantageous for India given its status as a substantial recipient of cross-border remittances. This strategic approach is poised to enhance the efficiency and effectiveness of cross-border transactions, leveraging the potential of CBDCs.
A significant reason for the development of CBDCs in India arises from the challenges posed by the proliferation of private virtual currencies and crypto-assets. Cryptocurrencies like Bitcoin present risks related to money laundering and terrorism financing, and their use could potentially undermine the stability of the domestic currency. CBDCs are positioned as a response to these challenges, offering a risk-free virtual currency backed by the central authority. The benefits include a reasonable level of user anonymity and ease of online transactions, ultimately rebuilding trust in the Central Bank currency.
Based on the usage and functions of the CBDC, the RBI has proposed issuing two versions of the CBDC.
- Retail CBDC (CBDC-R) and Wholesale CBDC (CBDC-W).
CBDC-W could be used to improve the efficiency of interbank payments or securities settlement. It could also be used for transactions relating to instruments such as government securities, commercial papers, debentures, etc. bypassing the bank account route.
CBDC-R would be an electronic version of cash primarily meant for retail consumption. It would provide an alternative medium for making digital payments (with direct access to Central Bank money). The RBI has considered the following key design factors relating to the CBDC:
RBI has contemplated crucial design questions concerning CBDC implementation, evaluating three models – Direct, Indirect, and Hybrid. The Concept Note emphasizes the suitability of the Indirect model for India, where authorized entities known as Token Service Providers (TSPs) distribute tokens created and issued by the RBI, handling customer-facing activities like verification and transaction processing.
Another pivotal consideration is whether CBDC should be interest-bearing or non-interest-bearing. The Concept Note outlines that an interest-bearing CBDC could serve as a store of value, aiding in the effective transmission of the Central Bank's monetary policy. However, it acknowledges that a remunerative CBDC may reduce the attractiveness of bank deposits, potentially impacting borrowing costs for banks and credit supply. Given that CBDC is an alternative to cash, the RBI tends to favor non-interest-bearing CBDCs to align with the characteristics of physical cash.
The structuring of CBDC as a 'token,' an 'account,' or as a combination of both is a critical decision. A token-based CBDC involves a digital token issued by the Central Bank, similar to a banknote, while an account-based system requires the maintenance of records/accounts for all holders. The former operates as a bearer instrument, while the latter necessitates records indicating ownership.
Addressing the anonymity aspect, the RBI acknowledges that cash transactions offer a level of anonymity, and CBDC, as an alternative to cash, should incorporate similar characteristics. However, the level of anonymity would be restricted to prevent illegal transactions, implemented through measures such as transaction limits akin to those in place for large cash transactions.
At present, the global financial landscape relies heavily on the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system for conducting international transactions. SWIFT serves as the backbone for a majority of international money and security transfers, exerting considerable influence over the control of transactions, particularly in terms of western currencies, especially the US dollar. The introduction of digital currencies like the e₹, along with counterparts from other nations, has the potential to disrupt the prevailing SWIFT system model. Much like cryptocurrencies such as Bitcoin, these digital currencies offer an alternative framework that can circumvent the traditional SWIFT system, providing a decentralized and potentially more inclusive approach to international financial transactions. This shift could reshape the dynamics of global finance by reducing reliance on a single centralized system and fostering greater financial autonomy for countries embracing digital currencies on the international stage. The emergence of these digital alternatives introduces a transformative element to the international monetary system, diversifying the methods through which transactions are conducted and challenging the dominance of the existing SWIFT-centric model.
Globally, over 90 percent of Central Banks are actively exploring the implementation of CBDCs. Notably, CBDCs have already been introduced in countries such as the Bahamas, Nigeria, and the East Caribbean Currency Union. Several nations, including China, Sweden, Ukraine, and Jamaica, are currently engaged in pilot projects or testing phases for CBDCs. China, in particular, has initiated a pilot program for the e-yuan (e-CNY) in selected cities, complemented by the launch of a mobile app featuring a digital wallet tailored for retail users. Moreover, there is a collaborative effort between France, Switzerland, and Singapore, marked by the initiation of a joint trial for their experimental CBDC—a noteworthy cross-regional endeavor. Numerous other countries and regions are actively in the process of developing and designing their own CBDCs.
The BIS Innovation Hub in Hong Kong, through the assistance of the Bank of International Settlements (BIS), has embarked on a groundbreaking initiative by developing the "mBridge" payment system. This innovative system is notable for its backing by CBDCs from Thailand, Hong Kong, China, and the United Arab Emirates (UAE). The collaborative effort among these countries aims to create a seamless and efficient cross-border payment solution, showcasing the potential of CBDCs in facilitating international transactions.
In the pilot test conducted by this collaborative initiative, a total of 164 payments were successfully transacted, amounting to an impressive sum of 22 million US dollars. What sets this initiative apart is its ability to effectively bypass the traditional SWIFT payment mode. The SWIFT system, dominated by conventional currencies, has long been the standard for international financial transactions. However, the successful execution of payments through the mBridge system underscores the transformative potential of CBDCs in reshaping the global financial landscape.
The mBridge payment system, backed by a coalition of CBDCs, signifies a strategic alignment among the nations to explore and harness the benefits of digital currencies as well as achieving financial innovation and enhancing the efficiency of international transactions. This collaborative effort not only demonstrates the practical application of CBDCs in cross-border transactions but also highlights the potential for these digital currencies to provide an alternative to existing payment systems. By sidestepping traditional channels like SWIFT, this initiative not only showcases the agility and
versatility of CBDCs but also hints at a future where digital currencies play a pivotal role in shaping the dynamics of global finance.
India's introduction of the Digital Rupee (e₹) via phased pilot projects signifies a strategic move aligned with global trends in CBDCs. The RBI's meticulous considerations, from design models to interest-bearing decisions, reflect a commitment to tailoring the Digital Rupee to India's financial landscape.
Globally, CBDC exploration is surging, with collaborative initiatives like the mBridge payment system showcasing the transformative potential of digital currencies in reshaping international transactions. As the world navigates this paradigm shift, the RBI and other Central Banks are at the forefront, steering toward a future where CBDCs redefine monetary transactions and global economic dynamics. The journey may be intricate, but the potential benefits make it a transformative force worth pursuing.