India’s Bitcoin Killer: RBI’s CBDC is e-Rupee, Announces Concept Note for Pilot

After the killing of the multi-headed Ravana this year, the multi-token cryptocurrency demon is next. The RBI has released a detailed concept note on how this is to be achieved. The pilot launch of e-rupee may happen sometime before March 31, 2022, as was declared in this year’s budget speech. The FinTech department of RBI has done the groundwork and the concept note details the tech, design and management related frameworks for creating e-rupee. The pilot will be for limited use only.

e-Rupee will be the CBDC of India, backed by the central bank, exchangeable on par with rupee, legal tender, a safe store of value (in case of pandemics), and well secured and integrated. A few user comments on this news in the media showed little enthusiasm for the announcement. These readers were more concerned about inflation and the fall in Rupee against dollar, and privacy and economic freedom being at risk with e-rupee.

Watershed movement in evolution of currency

“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,” states the concept note.

It is not clear at what state India currently stands, though it will soon transition to the pilot study phase. The common stages for launching a CBDC as seen around the world are – research, proof-of-concept, pilot study and final launch.

After studying use cases and specific conditions prevalent in countries like the Bahamas, Canada, Sweden, and others, the note details three models for deploying India’s CBDC – Direct CBDC where a central bank manages everything, and the intermediary-based one, which can be indirect or hybrid.

Two CBDCs have already been launched in the world – JAM-DEX of Jamaica and the Bahamian Sand Dollar. CBDC pilots are being carried out in countries like – Canada (Jasper), Uruguay (e-Peso), Ghana, Tanzania and South Africa, Saudi Arabia (Aber), Nigeria, and China (e-CNY).

Read more about the current status of CBDC around the world:

Blockchain – public, private or hybrid?

As for blockchain, there are only two mentions of blockchain in the concept note released, and one is in the context of security, which is seen by the concept note as the “prime design concern”. Here is what it says:

“Public blockchains preserve transparency but that does not provide cyber security by itself. On the other hand, centralised systems will have the same cyber security concerns as is applicable to the existing Fast Payment Systems (FPS).”

The RBI proposes two modes of e-rupee – token based and held by anonymous users, and account based, where an intermediary will verify or authenticate ownership with KYC. The token-based mode comes closes to cash, and will be suitable for retail use. The account-based mode will be suitable for wholesale markets where records of balances and transactions need to be maintained.

Benefits of e-Rupee

The concept note cites the following qualities of an e-Rupee that are lacking or not assured with private cryptocurrencies – trust, safety, liquidity, settlement finality and integrity. A prime example is the collapse of the stable coin platform Luna.

Other motivations for launching the e-rupee are:

  • reduction in operational costs involved in physical cash management
  • fostering financial inclusion
  • innovation in payments system
  • providing the public with uses that any private virtual currencies can provide, without the associated risks.
  • easier, faster and cheaper, almost live transactions, especially cross-border

The note also details the popularity of UPI and mobile payments that have taken over cash in case of small transactions – digital mode was used in over 50% cases, while only 30% payments were in cash. This is a huge swing in favour of digital. Earlier, cash accounted for over 87% of payments in small denominations.

A unique motivation for launching CBDC is that “CBDC can be a preferred mode of holding central bank money rather than cash in any uncertain situation like the one of pandemic COVID-19.”

No parallel economy and monetary system

Countering the threat of cryptocurrencies is another motivation cited. The note states the threat as: “… creation of a parallel economy and will likely undermine the monetary policy transmission and stability of the domestic currency. It will also adversely affect the enforcement of foreign exchange regulations, especially, the circumvention of capital flow measures.”

The RBI concept note on e-rupee can be accessed here:

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