RBI Notification

RBI’s Press Release: Operationalisation of CBDC Wholesale (e₹-W) Pilot

One of RBI’s core central banking functions is the management of money. The statutory powers for the same are vested in Section 22 of the RBI Act, 1934^[1]. Along with the GOI, the RBI is responsible for the designing, production and overall management of the currency of the nation, intending to ensure a sufficient supply of clean and genuine notes in the economy.

Digitisation has positively impacted central banking in India, along with the issue of currency notes in the digital form through the introduction of CBDC. Another initiative in lieu of the same is the press release 2022-2023/1118   dated 31st October 2022 from RBI in respect of the Operationalisation of CBDC Wholesale (e₹-W) Pilot, which shall come into effect from 1st November 2022.

What is the Reason behind issuing this RBIs Notification?

 It is a known fact that RBI communicates relevant information through press releases and notifications from time to time. In lieu of the same, the Reserve Bank of India issued a press release on 7th October 2022,  which mentioned the release of a Concept Note on Central Bank Digital Currency with the aim of creating awareness regarding CBDCs in general along with features of the Digital Rupee (e₹) particularly. It explains the objectives, benefits, choices and risks of issuing a CBDC in India. The note attempted to explain RBI’s approach towards introducing CBDC in India.

The note also discussed about the key considerations like technology and design choices, possible uses of the Digital Rupee, mechanism of issuing such currency etc., along with examining the implications of the introduction of CBDC on the banking system, monetary policy, financial stability, and analyses of privacy issues.

The press release also mentioned the idea of RBI for commencing pilot launches of e₹ for specific use cases. Along with this, the press release also stated that the Apex Authority should continue to provide relevant communications regarding the features and benefits of e₹ from time to time as the extent and scope of such pilot launches shall expand.

What does the Notification say?  

 In furtherance of the announcement of the RBI vide press release dated 07.10.22, the RBI has released the said notification on 31.10.22  stating that it shall start the first pilot in the Digital Rupee Wholesale Segment (e₹-W) commencing from November 1 2022. 

The use cases as per this pilot shall be the settlement of secondary market transactions in government securities. The use of e₹-W is expected to enhance the efficiency of the inter-bank market.

Settlements in the central bank money shall reduce the cost of transactions by pre-empting the need for settlement guarantee infrastructure or  for collateral to mitigate settlement risk.

Further, the future pilot shall focus on other wholesale transactions and cross-border payments on the basis of the learnings gathered from this pilot. 

There are a total of 9 banks  that have been identified for participating in the pilot, which are – SBI, HDFC Bank, Union Bank of India ICICI Bank, Bank of Baroda, Yes Bank Kotak Mahindra Bank, HSBC Bank and IDFC First Bank

The (e₹-R), which is the first pilot Digital Rupee – Retail segment, has been planned for launch within a month in the selected locations in closed user groups consisting of customers and merchants, the details regarding the operationalisation of the same shall be communicated in due course of time. 

What is CBDC? 

The Central Bank Digital Currency (CBDC) refers to the currency notes issued in digital form by a central bank. It is a type of legal tender used for the purpose of exchanging goods and services. Traditionally, fiat money used to come as banknotes and coins, but technology has enabled governments as well as financial institutions for the purpose of supplementing physical fiat money with a credit-based model wherein the balances and transactions are digitally recorded.

What are the Features of CBDC?  

The main feature of CBDC is discussed herein under –

• It is a sovereign currency which is issued by central banks as per their monetary policy
• It is reflected as a liability on the balance sheet of the central bank
• It must be accepted as a medium of payment, legal tender, as well as a safe store of value by all citizens, enterprises, and government agencies.
• This type of currency is freely convertible against commercial bank money and cash
• There is no need for the holders of this currency to have a bank account as it is a Fungible legal tender
• It is expected to lower the cost of issuing money and transactions

What are the Types of CBDC?

There are two types of CBDC, i.e.

Wholesale CBDC

Here the exchange and trade of currency take place between central and private banks. This type of exchange can be helpful in streamlining the payments between these institutions enabling faster cross-border transactions and reducing liquidity risk and counterparty credits. This type of digital currency is considered as most attractive due to its ability to make the existing wholesale financial systems quicker, more economical, and safer at the same time. 

Retail CBDC

This type of digital money is used by consumers and other ordinary people for conducting the day to day transactions. The CBDC is based on distributed ledger technologies like Blockchain and offers anonymity, availability 24/7/365, traceability and the feasibility of an interest rate application. It also helps in mitigating third-party involvement, thereby resulting in the elimination of the chances of criminal activities.

What are the Benefits of CBDC?  

The benefits of CBDC are discussed below-

• CBDC can help in providing an easy way to speed up a reliable sovereign-backed domestic payment and settlement system, which can partly replace physical currency. Digital currency can also be used in the case of cross-border payments depending upon the design compatibility of the country, its interoperability, and legal permissibility.
• CBDC can lead to a cultural shift towards virtual currency by way of  reduction in currency handling costs, eventually facilitating cross-border payments, with trading partners having a two-way dealing for the creation of interoperability as the system integrates.
• CBDC can be used for many other financial activities for pushing the informal economy into the formal zone, which can help in ensuring better regulatory and tax compliance along with paving the way for furthering financial inclusion.
• CBDC can help in the mitigation of risks and reduction with regard to the management of paper currency costs of phasing out soiled notes, insurance, transportation and logistics. Such significance of CBDC was rightly understood in the Union Budget of 22-23, resulting in the decision of launching CBDC at the beginning of the fiscal year.  
• It shall also stop people from depending upon crypto-currencies as a means for the transfer of money. However, crypto-currencies the value of which changes on demand and supply, continue to be used by people having a niche for speculation.
• Though RBI has been averse to crypto-currencies due to the inherent risks, a developing economy banning such products could indicate refraining from innovations. It could also showcase the unsturdy risk management systems to cope with crypto-currencies. Therefore the decision of launching CBDC in India affirms its competence to manage its attendant operational risks.

Conclusion

The press release can be considered an attempt of the RBI towards promoting digital currency in India along with enhancing the settlement of secondary market transactions for govt. securities. This can further help in launching Digital Rupee – Retail segment (e₹-R) at the earliest, which can benefit the banks and consumers. 

Read our Article: RBI issues Notification on Risk Weights for Exposures to Corporates and NBFCs

RBI-Notiffication-31-October-2022-pdf