The Reserve Bank of India (RBI) has announced the launch of the first pilot for retail digital Rupee (e₹-R) on December 1, 2022. Popularly known as Central Bank Digital Currency or CBDC, it is a way for the central bank to digitalise currency in circulation and speed up cashless payments.
The question now arises whether the new way of payment can be a direct competitor of UPI and mobile wallets such as Paytm and Google Pay. Experts say digital rupee is not a direct competitor to existing payment methods but a new way of payment which will be more anonymous than traditional digital transactions which involves purchasing digital rupee one time from your bank and then subsequent transactions happen wallet to wallet.
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“It’s currency in digital token form on a blockchain. With a retail CBDC, you should be able to transact without any bank involved (like physical cash). It will have the same denominations like physical cash. It’s quite different from UPI which is an actual debit from your bank account. CBDC is a currency, a legal tender guaranteed by RBI,” says Vishwas Patel, Director, Infibeam Avenues Ltd and Chairman, Payments Council Of India.
The retail digital currency is proposed to be distributed through two-tier model, which means RBI will distribute the digital rupee to commercial banks — the first phase will begin with four banks, viz., State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank . These banks will further distribute currency into the hands of consumers. However, you will be able to transact with digital rupee through a digital wallet offered by the participating banks and stored on mobile phones.
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“Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations,” stated RBI in a press release. Later on, four more banks – Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank – will join the pilot subsequently. The pilot would initially cover four cities — Mumbai, New Delhi, Bengaluru and Bhubaneswar – and later extend to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla.
While Paytm and Google Pay helps in making digital payment backed by physical currency, digital rupee will be an electronic form of legal tender. Going forward it is possible that mobile payment companies could have a section of their apps dedicated to digital rupee.
“With the Indian government’s announcement of a digital rupee, there is speculation about how this will impact the business of popular digital wallets. While the digital rupee is still in the early stages of development, it is expected to have a major impact on the way businesses operate in India. For starters, the digital rupee will make it easier for businesses to transact online. This is because the digital rupee will be based on blockchain technology, which will allow for fast and secure transactions. Additionally, the digital rupee will also be backed by the Reserve Bank of India (RBI), which will give it more credibility,” says Mayank Goyal, Founder and CEO, moneyHOP.
What will be the rules of using the digital rupee?
The rules for using the digital rupee are still being worked out, but there are a few things that are known for sure.
“First, it will be stored in a digital wallet, which could be linked to a person’s Aadhaar number. Second, the digital rupee will be backed by the Reserve Bank of India. This means that it will have the same value as the regular rupee. Third, the digital rupee can be used to make payments for goods and services just like regular currency. Fourth, the digital rupee can be transferred from one person to another using a mobile phone. Fifth, the digital rupee can also be used to pay taxes and utility bills,” explains Goyal.
The digital rupee is also expected to reduce the cost of transactions. This is because there will be no need for intermediaries to complete a transaction. As a result, businesses will be able to save on transaction fees. While currently the focus of CBDC is on domestic use, the Central Bank is expected to soon start the groundwork for cross-border transactions.
