The Reserve Bank of India (RBI) has kicked off a pilot run of its Central Bank Digital Currency (CBDC) for the wholesale sector. Nine banks, including State Bank of India, Bank of Baroda, Union Bank of India, ICICI Bank, HDFC Bank, Yes Bank, Kotak Mahindra Bank, IDFC First Bank and HSBC participated in the pilot.
RBI had last month released a concept note on the CBDC and said that it will soon pilot launch e-rupee for specific use cases. But what is digital rupee and how is it different from cryptocurrency?
What is Digital Rupee?
The concept of digital currency can be a little difficult to understand, so let's make it simple. Digital rupee or CBDC is similar to the physical money you carry on a day-to-day basis except that it is digital or in a virtual space. If you want an even simpler example, then the transactions are similar to those you make through UPI or any digital payment app.
This digital rupee will be issued by the central bank, which means it is not much different from your banknotes.
Where will Digital Rupee be applicable?
Digital Rupee for now will be used for only wholesale transactions and will be limited to large payments and settlements. CBDC Wholesale will be used by large financial institutions like banks, large non-banking finance companies and other transaction institutes. According to the RBI, it will be used as the settlement amount of purchase and sale of government bonds.
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The central bank also plans to use it for retail transactions soon. This will more likely be used by you and me for common everyday transactions. In the second phase it will start with selecting locations and banks first and people from all age groups will be included to shed light on what features are lacking.
How can you check Digital Rupee?
Just like you check your bank balance or your digital wallets you can check your digital rupee. CBDC will be based on blockchain technology which will record transactions in a centralised ledger. Anyone wishing to pay can directly make the transactions and it will reach the account. Another important point to remember is that one can easily exchange the physical cash for the digital cash as they both share the same value. Which means 1 digital rupee is equal to 1 rupee coin.
Features of Digital Rupee
CBDC is a digital token of the country and it cannot be harmed or lost like the notes or coins that we use daily. It will also make business transactions easier and faster. The RBI hopes that with the Digital Rupee we can get rid of problems like fake currency.
How are CBDC and crypto different?
CBDC is the digital form of the country's physical or fiat currency that is issued by the central bank. Whereas, cryptocurrency is digital money that is created to function as a means of exchange. You can control the production of new units of a certain digital currency and in addition it also uses encryption to safeguard and verify transactions.
Cryptocurrency is decentralised and doesn't have a set or predetermined value or backing. But the digital rupee is centralised and issued by the central bank.
CBDC uses a private blockchain network that has prior permission whereas cryptocurrencies use a permission-less open network.
If you use crypto you can keep your identification anonymous but with CBDC that is not an option as your CBDCs will directly be linked to your bank accounts.
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