The Reserve Bank of India (RBI) has announced that the first pilot for the retail version of the digital Rupee (e₹-R) would be introduced on December 1, 2022.

Where would be the pilot project launched?

• The pilot will initially cover the four cities of Mumbai, New Delhi, Bengaluru, and Bhubaneswar, where customers and merchants will be able to use the digital rupee (e₹-R), or e-rupee.
• Four banks will be involved in the controlled launch of the digital currency in these four cities: State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank.
• The service will be subsequently extended to the cities of Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.
• Four more banks — Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank — will join the pilot.

What is Central Bank Digital Currency (CBDC)?

• CBDC / Digital Rupee is a RBI bank-issued digital currency which is backed by some kind of assets in the form of either gold, currency reserves, bonds and other assets, recognised by the central banks as a monetary asset.
• The present concept of CBDCs was directly inspired by Bitcoin, but a CBDC is different from virtual currency and cryptocurrency.
• Cryptocurrencies are not issued by a state and lack the legal tender status declared by the government.

What are the types of Digital Rupee?

• Based on the usage and the functions performed by the digital rupee and considering the different levels of accessibility, CBDC can be demarcated into two broad categories:

1. General purpose (retail) (CBDC-R): It is an electronic version of cash primarily meant for retail transactions. It will be potentially available for use by all — private sector, non-financial consumers and businesses — and can provide access to safe money for payment and settlement as it is a direct liability of the central bank.
2. Wholesale (CBDC-W): It is designed for restricted access to select financial institutions. It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market more efficiently and securely in terms of operational costs, use of collateral and liquidity management.

What are the forms of CBDC?

The central bank says e-rupee, or CBDC, can be structured as token-based or account-based.

1. Token-based CBDC: It would be a bearer instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them. In this, the person receiving a token will verify that his ownership of the token is genuine. It is viewed as a preferred mode for CBDC-R as it would be closer to physical cash.
2. Account-based CBDC: It would require maintenance of record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances.  In this case, an intermediary will verify the identity of an account holder. This system can be considered for CBDC-W.

What’s the model for issuance?

• There are two models for issuance and management of CBDCs under the RBI’s consideration — direct model (single tier model) and indirect model (two-tier model).

• Direct model: Here the central bank will be responsible for managing all aspects of the digital rupee system such as issuance, account-keeping and transaction verification.
• Indirect model: It would be one where the central bank and other intermediaries (banks and any other service providers), each play their respective role. In this model, the central bank will issue CBDC to consumer’s indirectly through intermediaries and any claim by consumers will be managed by the intermediary.

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