The Reserve Bank of India (RBI) will launch the first trial of the retail version of the central bank digital currency (CBDC) tomorrow, December 1, just a month after it began a trial of the wholesale portion of the digital rupee. Let’s take a look at the fine print:
What is a Central Bank Digital Currency?
A CBDC is a fiat currency issued in digital form by a central bank. It can be exchanged for equivalent value with existing currencies.
Types of CBDCs
According to the purpose and function of CBDC, and taking into account different levels of accessibility, it can be roughly divided into two types – general (retail) (CBDC-R) and wholesale (CBDC-W).
Retail CBDC
CBDC-R is an electronic version of cash primarily for retail consumption. A retail CBDC could provide secure funding for payments and settlements as it is the direct responsibility of the central bank. For CBDC-R, a token-based CBDC with a layered architecture model is proposed, where RBI will only issue and redeem e-rupees, while distribution and payment services will be entrusted to banks.
A retail CBDC (e₹-R) may be available to all, ie. The private sector, non-financial consumers and businesses, while wholesale CBDCs are designed to limit access to specific financial institutions.
The rapid acceptance of digital payment methods is one reason why retail CBDCs may be successful. The Reserve Bank’s Digital Payments Index (RBIDPI) indicates significant growth in the adoption and deepening of digital payments across the country.
retail pilot
The retail pilot will initially cover four cities – Mumbai, New Delhi, Bengaluru and Bhubaneshwar. It will subsequently be expanded to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Cochin, Lucknow, Patna and Shimla.
The pilot project will take the form of digital tokens representing fiat currencies. It will be issued in the same denomination as banknotes and coins, and will be issued through intermediaries (ie banks). Users will be able to transact with e₹-R through digital wallets provided by participating banks and stored on their phones/devices.
Transactions using a retail CBDC can be either person-to-person or person-to-merchant, and payments can be made using a QR code displayed at the merchant’s location.
A retail CBDC will not earn any interest. It can be converted into other forms of currency, such as bank deposits.
The Reserve Bank of India has identified eight banks to participate in the retail CBDC pilot in phases, with the first phase starting with four banks — State Bank of India, ICICI Bank, YES Bank and IDFC First Bank. Four more — Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank — will join the pilot later, the RBI said.
How is CBDC different from other digital payments like UPI?
CBDCs are more anonymous than traditional digital transactions. In a CBDC, the core bank would have a one-time debit for currency purchases, but all subsequent transactions would be transferred from one wallet to another.
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RBIDPI |
| March 2018 (baseline) | 100 |
| March 2020 | 207.84 |
| March 2021 | 270.59 |
| March 2022 | 349.30 |