Central Bank Digital Currency : The rise of the eRupee (e₹)
Cryptocurrencies are on a phenomenal rise. This has raised concerns among many Central Banks around the world about the safety, security and viability of these currencies and also brought forth thoughts on how to protect citizens against potential frauds and safe gaurd their interests.
Along with these potential risks, the central banks around the world are also coming to embrace the advantages that the crypto currency or digital money can provide. This article explores the concept of CBDC that is proposed by the Reserve Bank of India (RBI).
What is CBDC ?
Central Bank Digital Currency (CBDC) is a digital form of currency notes issued by a central bank, in this context that would be the RBI. CBDC has many motivators for implementation, but for India, there are some unique requirements.
The e-Rupee is another option for payments that will be available in the current suite of options that users have. Being an electronic form of sovereign currency, CBDCs have all the features that the physical currency provides.
CBDC can be classified into two broad types :
- Retail CBDC [R-CBDC] : General purpose CBDC for usage by all types of retail users.
- Wholesale CBDC [W-CBDC] : CBDC for restricted financial institutions for settlement of interbank transfer and wholesale bulk transactions.
What are the key features of CBDC ?
World over there has been a decline is the usage of paper currency, with many users using digital forms of payment exclusively. CBDC has the following benefits :
- More efficient issuance than the existing physical currency notes
- No restriction on movement of currency, especially with geographical barriers
- Ease of distribution
- Increasing demand from users for digital modes of payment and virtual currency
- Reduces cost of cash management, especially in India, where cash continues to form a significant part of payment methods.
- Increased inclusivity in digital payment eco system, wherein participation from remote areas, where online modes are not available, becomes a possibility.
- CBDC being a sovereign currency, ensures settlement finality and enhances risk management.
- Enhances cross-border payments and provides real-time settlement finality.
Benefits of Digital Currency to users
- R-CBDC is a direct Central Bank liability and hence can provide access to safe money for payment and settlement
- W-CBDC will make the settlement and payment proccess and cycle more efficient and transparent
Issuance and Management models for CBDC
There are two models for issuance and management of CBDC : —
- Direct Model (Single Tier Model) : Central Bank assumes all responsibility for management of CBDC from issuance, book-keeping and transaction verification
- Indirect Model (Two Tier Model) : Along with Central Bank, other intermediaries share the management of CBDC, with each one managing different or all aspects of e-Currency management.
CBDC Forms of Holding
CBDC can be owned in the following ways.
Token-based -> A token-based CBDC is like having a bank note. The one who holds the token owns it, similar to currency note. The verification of token ownership and provenance is responsibility of token holder.
Account-based ->In an account-based system a record of balances and transactions of all holders of the CBDC ownership would have to be maintained by an intermediary. The intermediary also assumes responsibility of verification of token and identity of holders.
Final Thoughts on digital Rupee
Having a digital currency for the Rupee is indeed a need of the hour. It would give a lot of flexibility for users and Financial institutions alike for carrying out fiscal and monetary transactions. However, it remains to be seen how the eRupee will address the challenges to provide features like anonymity, liquidity and finality which physical cash provides.
What do you think? Will CBDC replace cash completely ? Or will CBDC evolve as a complementary system with more inclusivity and stability over other cryptocurrencies, rather than a replacement for cash?
Please leave your thoughts in the comments below. Thanks for reading!
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