Central Bank Digital Currency - All You Need To Know?

The Reserve Bank of India (RBI) announced that the retail digital rupee will be launched on a pilot basis on December 1, 2022. The central bank has identified eight banks to participate in this trial in stages. The RBI will print digital currency in the same denominations as paper money and coins. Only digital wallets provided by banks participating in the RBI's digital rupee programme can conduct digital currency transactions.

What is CBDC?

Central Bank Digital Currency (CBDC) is a digital form of a central bank's currency notes. They are different from physical cash or central bank reserve/settlement accounts in that they are new types of central bank money. A central bank liability denominated in an existing unit of account that serves as both a medium of exchange and a store of value. The Reserve Bank of India's Central Bank Digital Currency (CBDC) is legal tender, according to the concept note. According to the RBI, the CBDC, also known as the Digital Rupee or e-Rupee, is the same as a sovereign currency and is exchangeable one-to-one at par with fiat currency.

Features of CBDC

• CBDC is a sovereign currency issued by Central Banks to support their monetary policies.
• It appears on the central bank's balance sheet as a liability.
• All citizens, businesses, and government agencies must accept it as a medium of payment, legal tender, and safe store of value.
• Cash and commercial bank money are freely convertible.
• Holders of fungible legal tender do not need to have a bank account.
• It is expected to reduce the cost of issuing money and conducting transactions.

What are the advantages of the CBDC?

• The first advantage is the possibility of a more efficient payment system in areas where managing currency is costly.
• CBDC has the potential to increase financial inclusion because it does not require users to have a bank account.
• If a currency becomes unavailable for any reason, the CBDC may take steps to ensure that people can obtain legal tender. If CBDC and cash were issued as legal currency, they would be legally recognised as a valid method of payment.
• It will improve settlement system efficiency, spur innovation in the cross-border payments space, and provide the public with uses that any private virtual currency can provide, but without the associated risk.

Types of CBDC

CBDC is divided into two categories: general purpose or retail (CBDC-R) and wholesale (CBDC-W) (CBDC-W). Retail CBDC could be used by anyone, including the private sector, non-financial consumers, and businesses, whereas wholesale CBDC is only available to a select group of financial institutions.

CBDC-R

CBDC-R can be used by anyone in the private sector, including non-financial consumers and businesses. CBDC-R is a type of electronic cash that is primarily intended for retail use. With a diverse range of payment products ranging from RTGS, NEFT, to UPI, and an exponential increase in digital transactions, India already has a solid payment system in place. CBDC-R will be a secure central bank instrument with direct payment and settlement access to central bank funds. It is also claimed that it can help a country's retail payment system.

CBDC-W

Wholesale CBDCs, on the other hand, are only available to financial institutions. CBDC-W has the potential to improve the efficiency of interbank payments and securities settlement. It has the potential to improve the efficiency and security of financial transaction settlement systems used by banks in the G-Sec Segment, Inter-bank market, and capital market in terms of operational costs, collateral use, and liquidity management.