Understanding Digital Rupee: India's Official Digital Currency

What is a Digital Currency?

Digital currency is any currency that’s available exclusively in electronic form. Such currencies are only accessible with computers or mobile phones because they only exist in electronic form. In simpler terms, digital currency is money in an electronic form exchanged for goods and services without using physical money such as paper bills or coins.

Digital currency is also called digital money, electronic money, electronic currency, or cybercash.

So far we have witnessed electronic exchange of money by way of transfer between bank accounts or payments through debit or credit card. But with digital rupee we are going to witness an altogether different way of transacting money.

What is Digital Rupee?

Central Bank Digital Currency, commonly referred to as CBDC, or e-Rupee or Digital Rupee is a digital form of currency issued by the Reserve Bank of India. The digital rupee is not substantially different from banknotes, but being digital it is likely to be easier, faster, and cheaper.

In simpler terms, cash will now be of two types: paper/physical (banknotes, coins) & digital (CBDC). Just like the physical notes are printed & issued by the central bank, digital currency will be digitally created by RBI & pumped into the system. The money held in your bank account is infact the physical currency that is present somewhere in the banking system. However, digital currency is not something that was initially a physical currency and then converted to digital form. It is an independent currency which does not have a physical cash equivalent in the system anywhere.

How to use the Digital Currency and what will be its impact on current payment system?

The digital rupee will provide users with an additional option for making payments, while the existing payment system is still in place. The money will be in virtual form like other cryptocurrencies but shall be regulated by the RBI.

The RBI had said earlier: “CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.”

The users will be able to transact with e-Rupee with the help of a digital wallet as provided by the participating banks and money shall be stored on mobile phones and devices. Using QR codes, the transactions can be done either person-to-person or person to the merchant.

Role and the Future of CBDCs in Today’s World

CBDC can be classified into two basic categories- Wholesale CBDC and Retail CBDC. The RBI’s prime objective for launching Digital Rupee is to advance India in the race for virtual currencies as cryptocurrencies are becoming popular these days.

With the help of the Digital Rupee, customers can pay directly, saving transaction costs and enabling real-time account settlements. Secured with blockchain and advanced encryption technology, digital rupee will offer enhanced security and integrity in all our transactions. Also, it will speed up cross-border transactions and eliminate the need to open a bank account, bolstering the country’s overall digital economy.

When will Digital Rupee be rolled out for Public Use?

At the start, the RBI did a pilot launch of digital currencies for the wholesale sector. Following this, a significant step was taken on December 1st, 2022, when the pilot for the retail Digital Rupee was initiated. This pilot was carried out across four major cities: Mumbai, New Delhi, Bengaluru, and Bhubaneshwar. Notably, four major banks joined hands in this endeavor. Looking ahead, the RBI is progressively broadening the scope of this launch, encompassing more cities and banks in a phased manner. The intention behind this methodical approach is to thoroughly evaluate the strength of the entire process involving the creation, distribution, and real-time retail usage of the digital rupee.

Also, the Commercial banks primarily concentrate on customer-facing operations, secure transactions and regulatory reporting. The task of implementing CBDCs may add significant complexity for commercial banks and will require a drastic change across the organization to keep up with the need to innovate compatible products.

How is Digital Rupee different from Cryptocurrencies?

A cryptocurrency is a form of currency that is virtual and uses cryptography to secure its transactions. Although the Digital Rupee and Cryptocurrencies are virtual in nature, both are very different from each other.

Digital Rupee is a centralized form of money issued and regulated by the RBI whereas cryptocurrency is a decentralized and unregulated form of money with no intermediaries in the transaction process.
The Digital Rupee is only used for receipts and payments and is called the country’s digital fiat. However, Cryptocurrencies are both currencies and assets.
Users making cryptocurrency payments remain anonymous, which is not the case with Digital Rupee.

We at masterbrains.co.in have experienced professionals and experts empaneled with us who can help you understand more about Digital Currencies and proper taxation & accounting of cryptocurrencies and digital currencies. For more enquiries contact us at +91-8595867402.

FAQs on Understanding Digital Rupee: India's Official Digital Currency

What is the primary difference between digital currency and physical money?

Digital currency exists exclusively in electronic form and is used for transactions without physical money like paper bills or coins, whereas physical money is tangible and can be held in hand.

Is Digital Rupee the same as cryptocurrencies like Bitcoin?

No, Digital Rupee is different. It’s a centralized digital currency regulated by the Reserve Bank of India, while cryptocurrencies are decentralized and not regulated by any central authority.

How will Digital Rupee be stored and used?

Users can store Digital Rupee on digital wallets provided by participating banks and make transactions via QR codes, either person-to-person or person to the merchant.

Can I use Digital Rupee alongside traditional payment methods?

Yes, Digital Rupee will provide an additional option for making payments alongside the existing payment system. It’s a virtual form of currency regulated by the RBI.

What are the key advantages of Digital Rupee?

You don’t need to open a Bank Account to hold Digital Rupee. Digital Rupee offers faster, more efficient transactions, enhanced security through blockchain technology, and facilitates real-time account settlements

How does the RBI plan to roll out Digital Rupee for public use?

The RBI initiated a pilot launch for the retail Digital Rupee in four major cities, progressively expanding to more cities and banks to evaluate its effectiveness.

What is the significance of wholesale and retail CBDCs?

Wholesale CBDCs are used for big low-frequency transactions such as interbank settlements, while retail CBDCs like Digital Rupee are designed for public use, facilitating everyday digital transactions.

Are there transaction costs associated with using Digital Rupee?

There are no charges for doing a transaction through the Digital Rupee app.

Can Digital Rupee payments be traced and regulated?

Yes, Digital Rupee transactions are traceable by RBI. However, RBI has issued directions to the bank that small transactions need not be reported to RBI.

How does the introduction of Digital Rupee impact India's digital economy?

The Digital Rupee is expected to speed up cross-border transactions, reduce the need for physical currency, and contribute to the growth of India’s overall digital economy.

Team Master Brains