What Is The E-Rupee? BQ Explains

Five things you must know about the retail CBDC launched by the RBI.

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The Reserve Bank of India's pilot for the retail central bank digital currency was launched on Thursday as the regulator tests it out among a closed set of users, including individuals and merchants.

The CBDC, dubbed e-Rupee, will be treated as legal tender and distributed to users through their banks. It would be issued in the same denominations as the paper currency and coins, the RBI said in a statement. Customers can hold the digital currency in a designated mobile wallet provided by their respective banks.

In the first phase, the pilot will be launched in four cities: Mumbai, New Delhi, Bengaluru, and Bhubaneswar. It will be later extended to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla, the RBI said.

The first phase will begin with four banks: State Bank of India, ICICI Bank Ltd., Yes Bank Ltd. and IDFC First Bank Ltd. Others, including Bank of Baroda Ltd., Union Bank of India Ltd., HDFC Bank Ltd. and Kotak Mahindra Bank Ltd. will join subsequently.

While the RBI gave out the basics of what the pilot entails, BQ Prime explains what exactly is the e-Rupee and how it works.

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What exactly is the e-Rupee?

In simple terms, the e-Rupee is the digital avatar of the currency notes and coins in your wallet. The mobile wallet provided by your bank can be used to either transfer funds to another individual, or pay for goods. Settlement is instantaneous, like in the case of a cash payment. With the e-Rupee, users will also experience the same features as cash, such as trust, safety, and settlement finality.

How will it work?

The retail CBDC will run on a digital ledger-based architecture where banks act as nodes for the network. Such CBDC models are called indirect or intermediated models, where banks perform checks for know-your-customer or anti-money-laundering requirements.

The digital currency will be transferred to users through their respective banks. The banks will provide the digital currencies in specific denominations in a designated mobile wallet, which can then be used to make payments.

Since the e-Rupee is legal tender, it can only be issued in specific denominations, as allowed by law. The RBI Act of 1934 allows the central bank to issue currency notes in certain denominations, such as two rupees, five rupees, Rs 10, Rs 20, Rs 50, Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000.

Will it earn interest?

The CBDC is the digital expression of cash. So just like cash in your wallet, the e-Rupee will also not earn you any interest.

Is it the same as UPI?

No. The unified payments interface, launched in 2016, is a mechanism to transfer funds from one bank account to another in a near instantaneous manner. The e-Rupee, though, is a legal tender issued by the central bank to users.

Typically, in a UPI transaction, while the payer and receiver's devices acknowledge that a transaction is complete, the settlement of funds happens a few minutes later. At times, transactions also fail to conclude. Through e-Rupee, the settlement is instant and final. Unlike the UPI, the e-Rupee is also a near anonymous payment method, where third-party entities will not be able to access any payment information without user consent.

Where can I use it?

The RBI is running a pilot process within a closed user group, where a fixed number of individual users and store owners are able to transact in e-Rupee. As part of the pilot, only person-to-person and person-to-merchant transactions are allowed. Other use cases will need to evolve in the future. The pilot will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real time. Different features and applications of the token and architecture will be tested in future pilots, based on the learnings from this phase.

Digital Rupee: Is It Cash? Is It A Card? No, It's A CBDC!