RBI Shares Concept Note on Digital Rupee or Central Bank Digital Currency
Moneylife Digital Team 07 October 2022
The Reserve Bank of India (RBI) on Friday released a concept note on central bank digital currency (CBDC) for the country. CBDC can be classified into two broad types, general purpose or retail (CBDC-R) and wholesale (CBDC-W), and RBI would soon start pilot launches of e-rupee for specific use cases, the central bank says in the note. 
In a release, RBI says, “the purpose behind the issue of this concept note is to create awareness about CBDCs in general and the planned features of the digital rupee, in particular. It explains the objectives, choices, benefits, and risks of issuing a CBDC in India. The note also seeks to explain RBI's approach towards the introduction of the CBDC."
In February this year, while presenting the Budget for 2022-23, finance minister (FM) Nirmala Sitharaman announced the introduction of a digital rupee issued by RBI. The FM said that the central bank digital currency (CBDC) will give a significant boost to the digital economy. "Digital currency will also lead to a more efficient and cheaper currency management system, and it will use blockchain and other technologies," she says.
RBI broadly defines CBDC as the legal tender issued by a central bank in a digital form. "It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender and a safe store of value. CBDCs would appear as liability on a central bank's balance sheet," it says in the concept note.
RBI's concept note also discusses key considerations such as technology and design choices, possible uses of digital rupee and issuance mechanisms. It examines the implications of the introduction of CBDC on the banking system, monetary policy and financial stability and analyses privacy issues.
RBI will soon commence pilot launches of e-rupee for specific use cases. "As the extent and scope of such pilot launches expand, RBI will continue to communicate about the specific features and benefits of e-rupee, from time to time," the central bank says. 
Commenting on the private virtual currencies, RBI says, these currencies sit at substantial odds to the historical concept of money. "They are not commodities or claims on commodities as they have no intrinsic value. The rapid mushrooming of private cryptocurrencies in the last few years has attempted to challenge the fundamental notion of money as we know it. Claiming the benefits of de-centralisation, cryptocurrencies are being hailed as innovation that would usher in de-centralised finance and disrupt the traditional financial system."
"However, the inherent design of cryptocurrencies is more geared to bypass the established and regulated intermediation and control arrangements that play a crucial role of ensuring integrity and stability of monetary and financial eco-system," it added.
As the custodian of monetary policy framework and with the mandate to ensure financial stability in the country, RBI says it has been consistent in highlighting various risks related to the cryptocurrencies. "These digital assets undermine India's financial and macroeconomic stability because of their negative consequences for the financial sector. Further, a wider proliferation of cryptocurrencies has the potential to diminish monetary authorities' potential to determine and regulate monetary policy and the monetary system of the country which could pose serious challenge to the stability of the financial system of the country."
"In this context, it is the responsibility of central bank to provide its citizens with a risk free central bank digital money which will provide the users the same experience of dealing in currency in digital form, without any risks associated with private cryptocurrencies. Therefore, CBDCs will provide the public with benefits of virtual currencies while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies," RBI says.
Design Choices
As CBDCs are an electronic form of sovereign currency, it should imbibe all the possible features of physical currency. The design of CBDC depends on the functions it is expected to perform, and the design determines its implications for payment systems, monetary policy as well as the structure and stability of the financial system. One of the main considerations is that the design features of CBDCs should be least disruptive.
According to RBI, CBDC can be classified into two broad types, general purpose or retail (CBDC-R) and wholesale (CBDC-W). "Retail CBDC would be potentially available for use by all viz. private sector, non-financial consumers and businesses while wholesale CBDC is designed for restricted access to select financial institutions. While wholesale CBDC is intended for the settlement of interbank transfers and related wholesale transactions, retail CBDC is an electronic version of cash primarily meant for retail transactions," it says.
The central bank says retail CBDC can provide access to safe money for payment and settlement as it is a direct liability of RBI. Wholesale CBDC has the potential to transform the settlement systems for financial transactions and make them more efficient and secure. Going by the potential offered by each of them, there may be merit in introducing both CBDC-W and CBDC-R, it added.
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