E-Rupee: RBI Releases Concept Note On Central Bank Digital Currency

The Reserve Bank of India has issued a concept note exploring different dimensions and impact of issuing a central bank digital currency.

The digital currency has been named the e-rupee and has been defined as legal tender issued by the central bank in digital form.

Key motivations for issuing the CBDC include reduction in cost of physical cash management, fostering financial inclusion, innovation in cross-border payments and the provision of uses to the public that privately issued virtual currencies can offer, according to the concept note.

While the RBI has, in the past, declared its intention to trial a 'wholesale' version of the CBDC later this year, the note said that there is merit to issuing both wholesale and public-facing 'retail' CBDCs.

Wholesale CBDCs would be used to settle inter-bank transfers and related wholesale transactions, while a retail CBDC would be similar to the digital version of a banknote.

Structured as an exploratory note on design, technology, and policy choices surrounding the CBDC, the note does not indicate the specifics of what the RBI wishes to pursue, but hints at the central bank's preferences and the pros and cons of the different approaches.

"A wider proliferation of cryptocurrencies has the potential to diminish monetary authorities' potential to determine and regulate monetary policy," the note said, admonishing privately issued digital currencies.

"Though, at the outset, establishing a CBDC creation/issuance may entail significant fixed infrastructure costs, but subsequent marginal operating costs shall be very low," it said.

Since CBDC payments would be final and free from credit and liquidity risk, they could also help reduce settlement risk in the system, the note said.

While the paper examined different elements and approaches for the CBDC's design, technology infrastructure, anonymity and issuance, the RBI has also enumerated some of its preferences in the note.

Broadly, the RBI indicated a preference for issuing both retail and wholesale CBDCs, that would run on an intermediated model—with RBI issuing the CBDC and intermediaries like banks distributing it.

The RBI's states that the CBDC should not pay out any interest and have "managed anonymity" similar to cash.

It emphasised that the CBDC should be available for offline usage and its potential impact on the financial system and monetary policy should be borne in mind.

"RBI is currently engaged in working towards a phased implementation strategy," the note read.

Globally, 105 central banks are currently in the process of exploring a CBDC, according to data from The Atlantic Council. Ten countries have already launched a CBDC, including China, Jamaica and The Bahamas.