By Arun Kumar Shrivastav
The Reserve Bank of India (RBI) has launched a pilot program to test its digital currency, the digital rupee, in India’s four largest cities. The program is intended to assess the feasibility of a digital currency in India and to better understand its potential use cases.
The pilot will initially be available to a small number of users in Delhi, Mumbai, Bengaluru and Bhubaneswar.
Users who are interested in participating in the program can sign up through a mobile app that has been developed by the RBI. Once signed up, they will be able to use the digital rupee to make purchases and transactions with participating merchants and retailers.
One of the key features of the digital rupee is that it will be issued and maintained by the RBI. This will allow the central bank to have greater control over the currency and its circulation. The digital rupee will also be backed by the RBI, providing users with greater confidence in its value and stability.
Insurance companies are starting to warm up to the digital currency. For instance Reliance General Insurance has become the first general insurance company in India to accept the Reserve Bank of India’s (RBI) digital currency. In collaboration with YES BANK, the company will facilitate the collection of premiums through the bank’s e₹ platform.
Customers with an active e₹ wallet with any bank can make immediate payments by scanning Reliance General Insurance’s e₹ QR code. This launch is aimed at providing customers with a simple, secure, instant, and eco-friendly payment solution, while fulfilling the company’s promise of providing excellent customer experience.
The eRupee is a digital token that is equivalent to legal tender and is a sovereign currency backed by the RBI. Since it is digital, eRupee removes the issues of handling physical cash and offers the same anonymity as a banknote.
Additionally, eRupee transactions are conducted through an RBI-regulated entity, reducing banknote-related risks such as Anti-Money Laundering and Counterfeit Currency. Reliance General Insurance is providing customers with eRupee as a form of digital currency transaction option, promoting safe financial transactions.
Rakesh Jain, CEO of Reliance General Insurance, expressed his excitement about the launch and association with YES BANK, stating that the company aims to provide customers with greater ease, higher safety, and greener payment options. This launch is also in line with the company’s commitment to fulfilling the Indian government’s vision of Digital India.
Arun Agrawal, Country Head –Institutional & Government Banking, YES BANK, also expressed his pleasure in partnering with Reliance General Insurance in promoting Central Bank Digital Currency (CBDC), which is an industry first in the insurance sector. With higher familiarization and wider adoption, CBDC transactions are expected to complement existing digital payment systems with features such as authenticity, interoperability, and settlement finality.
Currently, Reliance General Insurance’s physical e₹ QR code is available at select branches for walk-in customers to scan and make instant payments. The company plans to make it available at all branches across the country, on its website, and on the Reliance Self-i app in the coming months.
Unlike cryptocurrencies such as Bitcoin and Ethereum, the digital rupee will not be decentralised. It will be a centralised digital currency, which means that it will be regulated and maintained by the RBI. This will help to reduce the risks associated with cryptocurrencies, such as volatility and lack of regulation.
One potential advantage of the digital rupee is its ability to promote financial inclusion. Currently, a large portion of India’s population does not have access to traditional banking services, such as checking and savings accounts. The digital rupee could potentially provide these individuals with a low-cost and accessible alternative to traditional banking services.
Another potential use case for the digital rupee is in cross-border transactions. Currently, cross-border transactions can be expensive and time-consuming due to the involvement of multiple intermediaries. The digital rupee could potentially streamline these transactions and make them faster and more cost-effective.
The RBI has been studying the potential use cases for a digital currency for several years. In 2021, the central bank released a report on the potential benefits and risks of a digital currency. The report suggested that a digital currency could help to reduce the cost of financial transactions, increase financial inclusion, and promote the use of digital payments.
However, there are several issues that the RBI needs to address in order to make the digital currency safe and accessible to everyone. While most of these issues have been discussed by the RBI’s, it remains to be seen how the central bank addresses them going forward.
One of the key issues that the RBI needs to address is the validation mechanism. While account-based CBDC may be suitable for wholesale CBDC applications, the token-based approach would be better suited for the retail needs of the Indian market. While the RBI has discussed all the available options, experts believe that India may take a hybrid approach down the line.
Another issue that has been widely debated is the degree of anonymity that CBDC would offer. While some experts believe that CBDC would impact privacy, others believe that it would offer more privacy. The RBI’s thoughts on this issue are very clear. For lower transactions, the maximum degree of privacy would be extended, i.e., wallets with smaller limits will not ask for many personal details, but for advanced wallets, all personal details may be required to be filled in.
Cybersecurity is another key concern that needs to be addressed, irrespective of whether CBDC is a centralised ledger or decentralised. Counterfeiting and cybersecurity will remain key concerns that need to be addressed.
Making people shift to CBDC is another challenge that the RBI needs to address. Making people aware of CBDC could be a huge challenge, and the central bank must think in advance about frictionless conversion of CBDC into cash across the country. For retail, the government had earlier launched e-rupee tokens through NPCI. It is still evolving, and the RBI needs to work on ensuring that CBDC is easily accessible and usable for the masses.
Technical challenges also need to be addressed, such as ensuring that CBDC is accessible in areas with connectivity issues. Interoperability with existing systems is another challenge that the RBI needs to address.
The launch of the digital rupee pilot comes at a time when several other countries are also exploring the potential of a digital currency. China has been working on its digital currency, the digital yuan, for several years, and has already begun testing it in several cities. The United States is also exploring the potential of a digital dollar, although it is still in the early stages of development.
Overall, the launch of the digital rupee pilot represents an important milestone in the development of digital currencies in India. While it is still in the early stages of development, the pilot program will provide valuable insights into the potential use cases and risks associated with a digital currency. If successful, the digital rupee could potentially revolutionise the way that Indians transact and interact with money. (IPA Service)