Indian CBDC-Retail"(e-Rupee)" demystified :

How is Indian CBDC -Retail (e-Rupee) different from UPI?

On 1st Dec.22, Reserve Bank of India (RBI) began the much-awaited trial run of India’s first retail central bank digital currency?(CBDC)?or ‘e-Rupee' in four cities—Mumbai, Delhi, Bengaluru, and Bhubaneswar—through eight participating banks.

CBDC is not expected to replace UPI , instead, it is touted to replace physical cash. Although both CBDC and UPI payments use a QR code, there are some subtle differences.

1. CBDC is more anonymous than traditional digital transactions:

In CBDC, the core banking will have a one-time debit for currency purchase, but all subsequent transactions, which move from wallet to wallet. More importantly, it is much more convenient than cash and safer.

RBI has asked lenders not to report low-value transactions made via the digital rupee, seeking to ensure its proposed virtual currency offers a similar degree of anonymity associated with paper money for business exchanges below a material value threshold.? Once the CBDC-R (Central Bank Backed Digital Currency-Retail) is transferred to customer wallets, banks will not track or report these transactions.?

2. How does the digital rupee work for the retail segment??

The distribution model for?digital?currency?is identical to the arrangement for paper?currency— the bank indents?digital currency?from the central bank, and the customer in turn purchases from us. The denominations are the same that are in circulation — say Rs 10, Rs 100, Rs 200, Rs 500, etc. Even 50 paise and 1 rupee coins are being issued digitally.

3. Where can the digital currency be used ?

For UPI, you need to have a?UPI?id or a QR. Similarly, to store or transact in digital currency, you will need to be part of the digital currency ecosystem like a digital rupee wallet. For transferring to, say a merchant, you need a digital rupee QR code.

4. How is digital currency different from any other digital payment like?UPI?

CBDC is more anonymous than traditional digital transactions. In CBDC, the core banking will have a one-time debit for currency purchase, but all subsequent transactions, which move from wallet to wallet. More importantly, it is much more convenient than cash and safer. A physical wallet that you carry can hold only a limited amount of cash. Plus, cash is also bulky and inconvenient. On the other hand, digital currency is lighter.

5. India already has a successful?UPI?adoption. What value addition will CBDC do over UPI equivalent?

India is a growing economy and our ecosystem is evolving fast. NEFT, RTGS, IMPS have evolved over the years. Each of these were innovations of that moment. So, every new introduction thus far is an improvement over the past. Similarly, CBDC can be a mega thing with various policy unlocks.

In fact, the learnings from UPI will help India fine tune the adoption and the tech infrastructure faster.

6. What is the benefit to the user over cash?

Digital currency is more secure. You can misplace cash, but your digital currency is held by your bank as a custodian on your behalf. It is also more convenient as it does not consume physical wallet space.

7. What is the roll-out plan?

Customers from selected pilot cities will be invited by their respective banks shortly.

8. Will the customer earn any interest on the digital rupee?

Like we don’t earn any interest held in normal cash in our pockets, similarly, there will be no interest on digital wallet balance. Think that instead of cash in your pocket, it is in your e-wallet.

9. What will be required to make it successful?

The CBDC will require building an ecosystem with critical mass, QR systems, education, etc, and will require critical mass. CBDC is being attempted by many countries. The Indian public is well-versed with the concept of?digital payments.

10.How will it benefit the financial system?

It saves the cost of printing currency, and adds to financial inclusion. Over time, with policy unlocks, CBDC can be operated without an underlying bank account, so one can hold and transact digital currency, just like you can hold cash in your hand without having a bank account.

CBDC Is More Anonymous Than UPI

The RBI has not yet clarified the degree to which CBDC transactions will be anonymous, though the income tax department allows cash transactions upto a certain limit to be carried out without furnishing any government identity proof and the same rules may apply, RBI governor Shaktikanta Das said at a post policy press conference.

At present, it is mandatory to furnish a proof of Permanent Account Number, a unique 10-digit alphanumeric number issued by the Income Tax Department to taxpayers, for any deposits above 50,000 rupees ($606.00).

Bankers have raised concerns about the project saying that in its current form, they don't see any benefits of CBDCs which is similar to internet-based banking transactions.

In the pilot phase, what the customer will experience in the Digital Rupee is a very small pie of the entire strategic block which the RBI has conceptualised. Over time, financial inclusion, offline payments, cross border, etc, can unfold with policy unlocks.