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Digital Rupee: What is it, Types, Benefits, and features

Features & updates - 27 Feb, 2024

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Imagine a digital version of your country’s cash, like a digital rupee (e₹) in India. This is a Central Bank Digital Currency (CBDC). Unlike cryptocurrencies like Bitcoin, which aren’t controlled by any one entity, CBDCS are created and managed by a country’s central bank, just like regular cash. This means they are secure and directly linked to the existing payment system.

What is the Digital Rupee?

The Digital Rupee, also known as e₹, is a new form of electronic money issued directly by the Reserve Bank of India (RBI). Similar to physical cash, it serves as a digital version of the Indian Rupee. Unlike other digital currencies, the Digital Rupee is centrally controlled by the RBI, ensuring the same level of stability and trust associated with traditional banknotes and coins.

Why is the Digital Rupee Being Introduced?

India is launching the Digital Rupee to:

Increase access to financial services: More people will be able to use banking and financial tools through the Digital Rupee.
Make transactions faster and safer: Digital payments will be quicker and more secure compared to using cash.
Align with India’s technological progress: The Digital Rupee reflects India’s growing embrace of digital solutions.
Support a digital economy: The Digital Rupee will encourage more people to use digital means for financial activities.
Reduce reliance on physical cash: This can lead to cost savings and potentially decrease theft or loss of money.
Enhance control over financial transactions: Regulatory bodies can better monitor and track financial activities.

How Does the Digital Rupee Function?

The Digital Rupee, or eRupee, is a type of electronic money. It’s essentially a digital form of Indian currency issued and controlled by the Reserve Bank of India (RBI). This digital currency utilizes secure and transparent technology, similar to blockchain, to ensure the safety and clarity of transactions.

Types of Central Bank Digital Currencies (CBDCs)

There are two main categories of CBDCs, designed with different purposes:

Retail CBDCs: These digital currencies are intended for everyday use by the general public, similar to how people use cash today. Individuals can use them to make payments for goods and services at stores or send money to others.
Wholesale CBDCs: These digital currencies are designed specifically for financial institutions like banks. They are used for settling transactions between banks, such as large financial transfers or payments for securities.

The Digital Rupee: A New Form of Currency

The Reserve Bank of India (RBI) has introduced a digital version of the Indian Rupee. This digital currency called the e₹, exists as electronic tokens. These tokens can be directly exchanged for physical cash in the same denominations (values) as rupees.

The RBI controls the issuance of e₹. They distribute it to banks and other authorized financial institutions, who then make it available to the public. Transactions using e₹ are recorded on a secure electronic system, ensuring transparency and security.

Obtaining Digital Rupee

Digital wallets: You can get a Digital Rupee through digital wallets offered by authorized banks and other approved institutions. These wallets act as secure digital storage for your e₹.
Money Transfer: Similar to withdrawing cash, you can also transfer money from your bank account to your e₹ wallet.
Adding cash: Conversely, you can convert physical cash into e₹ using a UPI gateway. This gateway facilitates a secure connection between your bank account and the e₹ wallet.

How to Add Funds to your e-Rupee Wallet

You can add funds to your e-Rupee wallet in two ways:

Using your Bank Account: If you have a Bank of Baroda account linked to your e-Rupee wallet, you can directly transfer funds.
Using Another UPI Account:
1. a. If you prefer not to use your Bank of Baroda account, you can choose “Other UPI Account” as the funding source.
2. b. A list of all UPI applications installed on your phone will be displayed.
3. c. Select your preferred UPI app, enter your UPI PIN, and confirm the transaction.

Once you’ve chosen your preferred method and completed the steps, the corresponding amount will be deducted from your chosen bank account and credited to your e-Rupee wallet.

How to convert your e-Rupee wallet balance to your bank account

You can transfer the e-Rupee tokens stored in your wallet to your linked bank account. This process involves transferring the digital tokens from your e-Rupee wallet, and the corresponding amount will be deposited into your connected bank account.

Sending and Receiving Digital Rupee (e₹)

Making payments to individuals: You can transfer e₹ directly to another person’s digital wallet using either their mobile number or a QR code. This eliminates the need to carry physical cash.
Paying at shops and businesses: When shopping at stores that accept e₹, scan the QR code displayed at the checkout counter. This allows for quick and secure transactions without needing cash or cards.

Key points:

e₹ transactions are similar to using online banking or mobile wallets but with the added benefit of being legal tender issued by the Reserve Bank of India.
This ensures the same level of trust and security as physical cash.

Key Features of the Digital Rupee

Issued by the Reserve Bank of India (RBI): The Digital Rupee is a legitimate form of payment, just like physical cash. It is issued and regulated by the RBI, ensuring its security and stability.
Widely Accepted: Individuals, businesses, and government agencies can all use the Digital Rupee for transactions.
Convertible to Cash: You can easily convert your Digital Rupee holdings into physical cash at any participating bank.
Legal Tender: Similar to physical currency, the Digital Rupee is recognized as a legal form of payment for all types of transactions.
Central Bank Oversight: The RBI maintains control and oversight of the Digital Rupee, fostering trust and stability in the system.
Potential for Future Advancements: The Digital Rupee has the potential to incorporate additional features like smart contracts, allowing for automated financial transactions.

Benefits of the Digital Rupee

Financial Inclusion: The digital rupee opens doors for individuals who lack access to traditional banking methods. This fosters their participation in the formal economy, bringing them into the mainstream financial system.
Reduced Transaction Costs: By eliminating the need for intermediaries, the digital rupee offers lower transaction fees compared to conventional banking systems. This translates to cost savings for both individuals and businesses.
Faster and More Efficient Transactions: Transactions using the digital rupee are processed swiftly, often within seconds, irrespective of geographical location. This eliminates delays and streamlines the payment process.
Enhanced Transparency and Security: Blockchain technology underpins the digital rupee, ensuring clear and traceable transactions. Additionally, robust cryptographic protocols safeguard the system, guaranteeing the security of financial information.
Government Oversight and Regulation: As a centrally controlled currency, the Reserve Bank of India (RBI) maintains authority over the issuance, circulation, and monetary policies related to the digital rupee. This enables the government to exercise control and implement regulations for financial stability.

Challenges and Considerations Regarding CBDCs

Privacy Protection: CBDCs raise concerns about personal financial information. Transactions might be easily tracked and monitored, potentially compromising individual privacy.

Cybersecurity Threats: CBDCs are vulnerable to cyberattacks. Implementing robust security measures is crucial to safeguard the integrity of this digital currency.

Impact on Traditional Banks: Widespread use of CBDCs could disrupt the current banking system. This might lead to bank runs or other systemic issues within the financial sector.

International Considerations: Global adoption of CBDCs could influence the way international monetary systems function. This raises concerns about the future role of the U.S. dollar as the world’s primary reserve currency.

Conclusion:

In essence, the Digital Rupee represents a significant advancement in India’s financial system. By embracing digital technology, it has the potential to:

Increase financial inclusion: This means making financial services accessible to a wider range of the population.

Reduce the cost of transactions: This could lead to lower fees and more efficient financial processes.

Simplify financial operations: Digital transactions can streamline financial activities for both individuals and businesses.

As the digital currency landscape continues to develop, the Digital Rupee is well-positioned to play a leading role in shaping the future of financial services within India. Furthermore, its success could set a valuable example for other countries considering establishing their digital currencies.