India's Pilot Launch of Central Bank Digital Currency

India's Pilot Launch of Central Bank Digital Currency "e-Rupee"

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October 15, 2022 - 5:50 am

Reserve Bank of India proposes a Phased Pilot of Its Version of A CBDC


The Reserve Bank of India has proposed a phased pilot of its version of a Central Bank Digital Currency, that attempts to address current concerns about this new form of money, according to a paper released by the agency. India's central bank revealed its goals for an electronic rupee, or "e-rupee," in a document that was released as a "concept note." It also explained the many testing phases that would take place and justified the development of a CBDC (central bank digital currency). The letter presents a number of justifications for the adoption of the e-rupee, the name that a working group within the RBI has selected for the Indian CBDC.

                                                        

What is CBDC?

The CBDC is a central bank's digital equivalent of bank notes, according to the RBI. It is issued by the central bank (in this example, the RBI) in accordance with the country's monetary policy as a sovereign or totally independent currency. Once it has been properly issued, CBDC will be accepted as legal tender as a method of payment by citizens, governments, and enterprises. Due to its government recognition, it can be readily converted into cash or notes from any commercial bank. However, the RBI does not back the e-rupee with interest. Taking into account that people could withdraw money from banks and convert it to a digital rupee, which could cause a banking crisis.

                                                          

Usage of E- rupees

E-rupees will be distributed to the general public through a token-based manner. The sender of the digital currency must be aware of the recipient's public key (a sort of digital address). The transfer is finished by combining the recipient's public key with their private key (individual password). Unique tokens based on approved techniques would need to be developed, which could be a little resource-intensive, according to the RBI concept note. The transactions are probably semi-anonymous; those involving higher amounts could need to be recorded, whilst those involving lower amounts might be fully anonymous, just like cash transactions


Private Digital Currencies

Although the RBI has not yet made a decision, some features of the digital rupee system may be supported by the distributed ledger technology that powers cryptocurrencies. But "private" digital currencies like bitcoin and Ethereum are by nature private. The RBI, on the other hand, will be in charge of creating and administering the digital rupee. 105 nations were examining CBDC in July 2022. Jamaica is the eighth nation to legalise CBDC, with JAM-DEX being the most recent. In 2020, the Bahamian Sand Dollar was introduced.                                                            


What Are CBDC-R And CBDC-W?

Retail CBDC (CBDC-R) has the ability to be utilised by everyone, including the private sector, non-financial clients, businesses, and organisations, in contrast to wholesale CBDC (CBDC-W), which is solely meant for specific financial firms. While CBDC-W is designed for the processing of interbank transactions and related wholesale operations, CBDC-R is an electronic copy of money that is primarily meant for retail transactions. According to the RBI, a token-based CBDC, which is a bearer instrument similar to banknotes, is thought to be a preferred mechanism for CBDC-R because it would be more like genuine currency. The tokens would be assumed to belong to whoever is in possession of them at the moment. For CBDC-W, it is possible to conduct research utilising account-based CBDC (which requires keeping track of all holders' transactions and balances as well as determining who is the legal owner of the financial balances). According to the RBI, a token-based CBDC, which is a bearer instrument similar to banknotes, is thought to be a preferred mechanism for CBDC-R because it would be more like genuine currency. The tokens would be assumed to belong to whoever is in possession of them at the moment. For CBDC-W, it is possible to conduct research utilising account-based CBDC (which requires keeping track of all holders' transactions and balances as well as determining who is the legal owner of the financial balances).


Challenges Ahead For CBDC

It is anticipated that the CBDC will generate a lot of data in real-time. It will be challenging to make efficient use of the Data, safeguard its privacy, and allay worries about its anonymity. The RBI document does point out that CBDC will provide public usage, as any private virtual currency may, but without the hazards. When mobile service or energy are unavailable, using CBDC's offline capability would be useful and improve availability and resilience in remote areas. The fact that India is well ahead of most other nations in terms of identification systems and protocols—which are at the core of any effort to develop a retail Central Bank Digital Currency—gives it a significant competitive edge. While practically every central bank is investigating the possibility of introducing a CBDC, it is unclear if the functional benefits of a CBDC cannot be more effectively delivered by enhancing existing systems. The ability of a CBDC to strike a balance between a person's right to privacy and the State's power to enforce taxes and laws is one important question.


Questions and Answers Questions and Answers

Question : "Why is the Reserve Bank of India proposing a phased pilot of its version of a Central Bank Digital Currency? "
Answers : The Reserve Bank of India is proposing a phased pilot of its version of a Central Bank Digital Currency in an attempt to address current concerns about this new form of money.
Question : What is the main difference between a CBDC and a regular currency?
Answers : A CBDC is a digital currency that is backed by the government, while a regular currency is not.
Question : What is the digital currency being distributed in this context?
Answers : The digital currency is e-rupees.
Question : What is the difference between a private digital currency like bitcoin and a CBDC?
Answers : A private digital currency like bitcoin is private, while a CBDC is administered by a central bank.
Question : What is the difference between account-based CBDC and token-based CBDC?
Answers : Account-based CBDC requires keeping track of all holders' transactions and balances as well as determining who is the legal owner of the financial balances. Token-based CBDC is a bearer instrument similar to banknotes and simply requires whoever is in possession of the tokens at the moment to be assumed as the owner.
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