Context

The Reserve Bank of India (RBI) proposed to make CBDC-R (Retail Digital Rupee) accessible to a broader population by allowing non-bank payment system operators to offer CBDC wallets.

About Central Bank Digital Currency

• Definition: Central Bank Digital Currencies (CBDCs) are a digital currency issued by a country’s central bank. They are similar to cryptocurrencies, except that the central bank fixes their value and is equivalent to the country’s fiat currency.

• Digital Rupee: The RBI’s CBDC, also known as the Digital Rupee or e-Rupee, is equivalent to a sovereign currency and may be exchanged one-for-one with fiat currency.
• CBDC’s Legality: The Finance Act 2022 amends the RBI Act, allowing it to launch Central Bank Digital Currency. The definition of a banknote was changed to allow the RBI to issue physical and digital currency by changing Section 2 of the RBI Act, of 1934.

Types of CBDC – Retail Digital Rupee and Wholesale Digital Rupee

• Retail Retail Digital Rupee: CBDC that people can use for everyday transactions.
• Wholesale CBDC:  It is a CBDC that can only be used by financial institutions such as banks and NBFCs.

CBDC – Retail Digital Rupee (e₹-R):

• Coverage: Retail Digital Rupee would cover specific areas in closed user groups that include participating customers and businesses. 
• Issuance: e₹-R is a digital token used as legal tender. It would be produced in the same denominations as traditional paper cash and coins. 
• Distribution through Intermediaries: Users can transact with e₹-R through a digital wallet issued by partner banks and stored on mobile phones/devices. Transactions can be made between individuals or between merchants.
• Payment through QR Codes: Payments to merchants can be made using QR codes displayed at their locations.
• Convertibility: Retail Digital Rupee, like cash, does not earn interest and can be converted into other forms of money, such as bank deposits.
• Features: The e₹-R offers trust, safety, and settlement finality, similar to actual cash. 
• Pilot Project: The RBI has picked eight banks to participate in this experiment. The pilot will initially cover four cities: Mumbai, Delhi, Bengaluru, and Bhubaneswar. 
  • It will be gradually expanded to include additional cities, banks, and e₹-R features.

CBDC-Wholesale (e₹-W):

• Settlement for Secondary Transactions: Pilot e₹-W will settle secondary market transactions for government securities.
• Advantages: 
  • The use of Wholesale Digital Rupee is intended to improve the interbank market’s efficiency. 
  • Settlement in e₹-W reduces transaction costs by eliminating the requirement for settlement guarantee infrastructure or collateral to mitigate settlement risk.