e-rupee: RBI's Digital Rupee Pilot Aimed To Transform India's Financial Landscape

Amid the exponential growth of private cryptocurrencies challenging traditional notions of currency, the Reserve Bank of India (RBI) has been steadfast in safeguarding India's monetary policy framework and ensuring financial stability. This commitment comes as a response to the inherent risks associated with the burgeoning digital assets, as underscored by the RBI during the unveiling of the E-rupee.

“The rapid mushrooming of private cryptocurrencies in the last few years has attempted to challenge the fundamental notion of money as we know it. As the custodian of the monetary policy framework and with the mandate to ensure financial stability in the country, the Reserve Bank of India(RBI) has been consistent in highlighting various risks related to cryptocurrencies,” RBI had said while unveiling the E-rupee.

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 can diminish monetary authorities’ potential to determine and regulate monetary policy and the monetary system of the country which could pose a serious challenge to the stability of the financial system of the country,” RBI said while highlighting the potential threat of cryptocurrencies on monetary policy.

In this context, it is the responsibility of the 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 the benefits of virtual currencies while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies.

E-rupee is the name of the central bank digital currency(CBDC) that has been issued by RBI on a pilot basis.  Reserve Bank broadly defines central bank digital currencies (CBDCs) as the legal tender issued by a central bank in a digital form.

It is similar to sovereign paper currency but takes a different form. It is exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender and a safe store of value.

CBDC, being a sovereign currency, holds unique advantages of central bank money like trust, safety, liquidity, settlement finality and integrity.

The key motivations for exploring the issuance of CBDC in India among others include reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency and innovation in the payments system. 

This will ensure the efficiency of the settlement system, boosting innovation in cross-border payments space and providing the public with uses that any private virtual currencies can provide, without the associated risks.

CBDC can be classified into two broad types viz. 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 is believed that Retail CBDC can provide access to safe money for payment and settlement as it is a direct liability of the Central Bank.

CBDC can be structured as ‘token-based’ or ‘account-based’. A token-based CBDC is a bearer instrument like banknotes, meaning whoever holds the tokens at a given point in time would be presumed to own them. A token-based CBDC is viewed as a preferred mode for CBDC-R as it would be closer to physical cash.

Since, CBDC-R is a token-based CBDC, the owner of the token would not require maintenance of records of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances.

The first pilot for CBDC-Retail was announced on 1 December 2022. 

Several banks including the State Bank of India (SBI), HDFC Bank, Union Bank of India, Punjab National Bank (PNB), and Bank of Baroda (BOB) have recently introduced interoperability of Unified Payments Interface (UPI) with the Digital Rupee.

How to register and make payments through 'eRupee by SBI'

Since it’s a pilot project, SBI identifies the users and merchants that should be included in the project.

Once you have been selected for the pilot project, you get an email officially from SBI or your issuer bank, in case of SBI it states, “Invitation to participate in the first pilot of Central Bank Digital Currency-Retail( Digital Rupee-e₹/SBI CBDC).”

Steps to register and make quick payments through 'eRupee by SBI’:

Step 1: Open AppStore or PlayStore to download ‘eRupee by SBI' 

Step 2: Firstly select the SIM card with which your SBI account is linked. Then, SBI verifies the account linked to the phone number.

Step 3: Now app asks you to fill in your name which is subjected to updation after verification with KYC records.

Step 4: Now the eRupee app asks you to select a type of wallet. Select a recoverable wallet, in this case, the wallet provider manages the keys on your behalf. The user shall be able to recover the wallet balance in the event of the loss of the device getting corrupted.

Step 5: Now, set up the wallet PIN.

Step 6: Now in this step, you need to link your debit card.

Step 7: Now you are all set to do transactions on eRupee app.

After opening the app, four options appear on the screen namely send, collect, load and redeem. Now you can simply load digital currency into your wallet by clicking on ‘Load’ option. The retail eRupee comes in denominations of 50 paise, 1, 2, 5, 10, 20, 50, 100, 200, 500 and 2000. Add the amount of these denominations and you are ready to go with digital rupee purchase.

Now that UPI QR code infrastructure is also linked with the Digital Rupee, this will help both users and merchants. When you make a UPI payment to a merchant such as a grocery shop, mall, hotel etc., you scan a quick response code (QR) and then transact the amount. Similarly, Digital Rupee transactions also happen like this by simply scanning a CBDC QR code and then making the payment.

Earlier, Digital Rupee transactions needed a different QR code than UPI, so merchants had to use two QR codes, one for UPI and another one for CBDC. Interoperability has solved this problem by interlinking the UPI QR code technology infrastructure with CBDC. Hence now a CBDC user can scan UPI QR code to make payments using CBDC.

"It has been nearly a year since our CBDC pilot project began. The insights gathered during this period have surpassed our expectations. We are now more convinced than ever that CBDC can serve as the most effective and efficient method for cross-border payments, especially for international transactions," stated RBI Governor Shaktikanta Das during the Governor's Series Talk at Frontiers of Central Banking in Asia in Marrakech on 13 October.

The Reserve Bank of India Governor, Shaktikanta Das, remarked that the results of pilot projects aimed at advancing Central Bank Digital Currency (CBDC) have shown promising results. The governor also highlighted that CBDC can play a significant role in cross-border payments without undue complexity.

“RBI has also been exploring the pros and cons of the introduction of CBDCs for some time. It is currently engaged in working towards a phased implementation strategy, going step by step through various stages of pilots followed by the final launch and simultaneously examining use cases for the issuance of its own CBDC (Digital Rupee (e₹)), with minimal or no disruption to the financial system. Currently, we are at the forefront of a watershed movement in the evolution of currency that will decisively change the very nature of money and its functions,” RBI added in the statement.