Pilot project for Digital Rupee

The Reserve Bank of India (RBI) recently launched its first pilot project to use central bank digital currency (CBDC) in the wholesale market for secondary trade in government securities (G-secs) beginning November 1. Within a month, a second pilot project on retail use of the digital rupee will begin in closed user groups.

Background –

• According to the RBI, e-Rupee can be structured as ‘token based’ or ‘account-based’.
  • A token-based CBDC is a bearer instrument, similar to banknotes, which means that whoever owns the tokens at any particular time is believed to own them.
  • In contrast, an account-based system would necessitate the keeping of a record of all CBDC holders’ balances and transactions, as well as indicating ownership of the monetary balances.
  • In a token-based CBDC, the individual receiving the token proves his ownership of the token is genuine, whereas an intermediary verifies the identity of an account holder in an account-based CBDC.
  • A token-based CBDC is preferred for CBDC-Retail since it is more similar to physical cash, but an account-based system can be considered for CBDC-Wholesale.
• The RBI is considering two models for the issuance and management of CBDCs — direct model (single tier model) and indirect model (two-tier model).
  • In the direct model, the central bank will be in charge of all aspects of the digital rupee system, including issuance, accounting and transaction verification.
  • The central bank and other intermediaries (banks and other service providers) each play their respective roles under an indirect model.
    • Here, the central bank will issue CBDC to consumers indirectly through intermediaries and any claim by consumers will be managed by the intermediary.

About a Central Bank Digital Currency (CBDC) –

• If a virtual currency (be it a cryptocurrency) is recognised by the central bank it is known as the CBDC.
• CBDCs are the virtual or electronic form of fiat currencies (like the Indian rupee). Hence, a CBDC is the legal tender issued by a central bank in a digital form.
  • It would appear as a liability on a central bank’s balance sheet.
• Many countries are exploring CBDC, with the Bahamian Sand Dollar was the first to debut CBDC in 2020, while Jamaica’s JAM-DEX was the most recent.

India’s approach to virtual currencies –

• In 2018, the RBI issued a directive prohibiting banks from providing services to the cryptocurrency ecosystem.
• The Supreme Court of India overturned this decision, calling it disproportionate given that such currencies were not prohibited in the country.
• A cryptocurrency law — the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 — that was supposed to be passed last year has yet to be enacted.
  • The bill seeks to prohibit all private cryptocurrencies in India.
  • However, it is expected to promote the underlying technology of cryptocurrency and its uses.
• Currently, there is no regulation or any ban on the use of cryptocurrencies in the country.
• In her 2022-23 Budget speech, the Finance Minister of India announced the launch of the Digital Rupee – a central bank digital currency (CBDC) – from 2022-23.