What is Retail CBDC and How is it Different from Wholesale CBDC?

The Indian government has announced its first pilot project to use CBDCs, or Central Bank Digital Currency, a new era in the country's economic ecosystem. The pilot would cover a small number of locations in a closed user group (CUG) of customers and merchants who would participate. The e-R would be a digital token that could be used as legal tender. It would be issued in the same denominations as current paper money and coins. Users will be able to transact with e-R by storing their mobile phones or devices in a digital wallet provided by participating banks. Transactions from person to person (P2P) and person to merchant (P2M) are both possible (P2M). Payments can be made to merchants using QR codes displayed at their locations. Trust, safety, and settlement finality would be physical cash characteristics of the e-R.

It does not pay interest and, like cash, can be exchanged for other forms of money such as bank deposits. The pilot will put the entire process of creating digital rupees, distributing them, and using them in retail to the test in real time. Different features and applications of the e-R token and architecture will be tested in future pilots based on the results of this pilot.

In stages, eight banks have been chosen to participate in this pilot. The first phase will involve four banks in four cities across India: State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank. Four more banks are Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra.

What is retail CBDC?

The retail CBDC, on the other hand, can be defined as one of the currencies issued to the general public. It is based on DLT, or distributed ledger technology, and its features include anonymity and traceability. Furthermore, these retail CBDCs are available 24 hours a day, 365 days a year, with the possibility of an interest rate application.

Unless and until we are discussing a form of DBT, a currency is always issued at a wholesale level by the Reserve Bank and then makes its way to retail hands through designated institutions (direct benefit transfer).

What is wholesale CBDC?

The term wholesale CBDC refers to financial institutions that hold reserve deposits with a central bank. It aids in the improvement of payment and securities settlement efficiency. Furthermore, these wholesale CBDCs contribute to the reduction of counterparty credit and liquidity risks.

According to experts, the wholesale CBDC is similar to what the RBI provides to banks.

Difference between Wholesale and Retail CBDC

Retail CBDCs are popular among central banks in emerging economies because they provide incentives to take the lead in the rapidly developing fintech industry and reduce cash printing and handling costs, paving the way for a cashless society.

Though both Wholesale CBDC and Retail CBDC are digital currencies issued by the central bank, the latter is used in the interbank system to effect a cross-border payment and thus has a variety of use cases.

What makes Digital Rupee different from digital money?

A CBDC would differ from existing digital money available to the public because a CBDC would be a Reserve Bank liability, rather than a commercial bank.

To summarise, CBDCs may be the next big addition to the financial infrastructure because they can ensure cost-effective global payments. Furthermore, users can benefit from increased security and transaction speed. Only time will tell where this new and innovative development will lead nations around the world.