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The Reserve Bank of India Launches the Digital Rupee Pilot Program in the Retail Segment

The Reserve Bank of India Launches the Digital Rupee Pilot Program in the Retail Segment

The Reserve Bank of India (“RBI”), vide a press release issued on 29th November 2022, launched its pilot program on Central Bank Digital Currency (“CBDC”) in the retail segment on 1st December 2022, one month after the launch of the pilot programme of the CBDC in the wholesale segment (which was intended for settlement of interbank transfers and related wholesale transactions).

The Central Bank Digital Currency – Retail (“e₹-R”) pilot has been launched to test the “robustness of the entire process of digital rupee creation, distribution and retail usage in real time” among participating customers and merchants in select locations in closed user groups.

As per the RBI, the e₹-R would represent the legal tender in the form of a digital token and would be issued through intermediaries, like banks, in the same denominations as the paper currency and coins that are presently used in the country. The e₹-R would offer features of physical cash like “trust, safety and settlement finality” and will not earn any interests. The RBI allows for Person to Person and Person to Merchant transactions using the e₹-R, which, in the case of transactions with merchants, can also be made using QR codes displayed at merchant locations.

The initial phase of the e₹-R pilot will begin with four banks (of the total eight selected banks) covering four locations, namely, Mumbai, New Delhi, Bengaluru and Bhubaneshwar and will then gradually be extended to other banks, users and locations.

Our Take

The e₹-R is structured as a token-based CBDC wherein the holder of the token is presumed to be the owner of such tokens. The e₹-R will be held in digital wallets (once issued by the intermediaries) allowing instantaneous settlements without any intermediation of the banks, as is usually the case with cash in hand. This is different from other online transaction mechanisms such as the unified payments interface (UPI) which involves settlement of transactions through bank accounts.

With the adoption of the CBDC and its introduction in the retail segment, India has become one of the front runners, globally, in digitization of money by developing a new form of fiat money.

The CBDC when implemented on a larger scale seeks to offer several long-term advantages such as reduction in operational costs involved in physical cash management, boost in innovation pertaining to cross-border payments and curbing violations in respect of money laundering, terror financing, tax evasions etc. and while the Central Government’s initiative of introducing the CBDC in the country is commendable, the success of the CBDC pilot programs (both in the wholesale and retail segment) will be critical in understanding the contours of the associated risks pertaining to financial stability and data protection and also in understanding whether India is ready to fully adopt this new form of money.

Links:
Link to the Press Release on Operationalisation of Central Bank- Digital Currency – Retail (e₹-R) Pilot: https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54773

Link to our blog on the Operationalisation of Central Bank- Digital Currency – Retail and the Concept Note on Central Bank- Digital Currency: https://www.saikrishnaassociates.com/the-reserve-bank-of-indias-digital-rupee-pilot-program-commences-in-the-wholesale-segment.php

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