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The Reserve Bank of India is about to launch a pilot of its Central Bank Digital Currency (CBDC), which is categorised as a digital form of legal tender. Commonly referred to as the digital rupee, it will be exchanged for the equivalent of existing currencies and will be considered an acceptable means of payment and a secure store of value.

Reserve Bank of IndiaThe CBDC issued, also known as e₹ or digital rupee, is intended to create an additional option to use the currency and is not much different from the notes currently issued; except that the digital rupee is expected to be digitally transacted and easy to use.

What is a digital rupee?

Digital Rupee or E-Rupee is the electronic form of Indian currency authorised and issued by any Central Bank.RBI Describe it as legal tender in digital format.

Consumers can use this currency in contactless online transactions. It is also convertible and customers can obtain cash of the same value at authorised banks.

Currently, RBI has selected nine banks for the pilot project, including HDFC, ICICI Bank, Kotak Mahindra and SBIThe main reason for this is the increasing demand for funds to print physical currency. This is mainly due to the increasing demand for funds to print physical currency.

In terms of functionality, the digital rupee may look similar to a cryptocurrency. However, the central government of India has been opposed to the latter due to its financial stability.

What is the difference between cryptocurrencies and digital rupees?

A digital currency is any currency that is offered entirely in electronic form. Electronic forms of money have come to dominate the financial systems of many countries. However, digital currencies are exchanged entirely virtually and do not leave the computer network.

The three main types of digital currencies are cryptocurrencies, central bank digital currencies (CBDC) and stablecoins.

cryptocurrencyIt is a digital currency that is not dependent on or controlled by any central bank or government agency. It works based on crypto and blockchain technology. Cryptocurrency transfers are not regulated.

The foundation of cryptocurrencies is provided by blockchain technology, which is the most common form of distributed ledger used for digital currencies. According to CoinMarketCap, there are over 21,000 cryptocurrencies available.

Cryptocurrency users can remain anonymous while making transactions. However, the Reserve Bank of India will have complete control and facilitation of the digital rupee.

In addition, the Reserve Bank of India has promised to protect cryptocurrencies from hacking, something that cryptocurrencies cannot guarantee as hackers can attack through quantum computing.

Please note that cryptocurrencies and digital rupees cannot be compared as both are used for different purposes. Cryptocurrency is also a digital asset. However, digital rupees can only be used for trading.

What is CBDC?

CBDC is a common term used globally, which has since been expanded to mean Central Bank Digital Currency. Many countries have successfully implemented CBDCs, the value of which is pegged to the value of their national fiat currency.

Initially, legal tender was issued in the form of coins and currency. With the advent of digital technology, a payments revolution ensued and customers began to rely on digital entities to send money.

Why does the Reserve Bank of India want to introduce CBDC in India?

There is a reason why cryptocurrencies have not received much support from the Reserve Bank of India. Since cryptocurrency is a decentralised digital currency in India, the Reserve Bank of India is unable to regulate or view the amount of money transferred or the person transferring the money in Bitcoin. This could lead to troubles like illegal money transfer activities or money laundering. Amidst the boom in online commerce and digital transfers, the Reserve Bank of India wanted to find a solution that would strengthen India's digital economy. This led to the emergence of the Indian digital rupee, which can be regulated and offers the benefits of cryptocurrencies.

Successful implementation of Digital Rupee will further reduce dependence on physical currency and save money for the Government. The digital rupee will not incur printing costs, logistics and distribution costs and will save on cash losses. People will be able to reduce transaction costs and make payments with greater efficiency in online transactions.

Types of CBDC

Depending on its use, it is divided into two types.

CBDC-R: Retail CBDC is a digital currency available to all users (public). It allows people to not carry physical cash and rely on a government-backed digital currency.

CBDC-W: Wholesale CBDC is only available to select financial institutions such as national banks and is restricted to public use. Wholesale CDBC can help them trade faster with the help of blockchain technology and automation.

Which banks are involved?

State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Mahindra Bank, Kotak, Yes Bank, IDFC First Bank and HSBC are the nine banks participating in the pilot project.

What are the advantages of CBDC over other digital payment systems?

The main concern of Indians who have become accustomed to digital payment platforms is how superior the digital rupee is compared to other available systems in the market.

The RBI's upcoming digital currency has the following advantages.

1. Indian buyers can pay without an intermediary

The digital rupee reduces the need for intermediary banking and payment facilitation systems for both domestic and international transactions. Imagine having a digital payment system where you can hand over cash directly to the recipient.

This is how CBDC works. The CBDC takes full responsibility for the transaction, handles the KYC and transfers the payment from the sender to the beneficiary without any work on the part of the intermediary.

2. Reducing transaction costs

Currently, the remittance fee itself accounts for 7% to 10% of the transaction value in India. in addition to this, private payment organisations are charging more transaction and hidden fees.

This is particularly difficult for businesses that interact globally and send international remittances. CBDC is said to reduce fees by as much as 2% to 3%, making domestic and cross-border transactions less costly.

If the central bank did not charge any transaction fees, it would incur far lower transaction costs than cards and digital payment systems.

3. Real-time account settlement

CBDC India can transfer money and settle accounts in real time instantly, unlike digital payment systems that take time.

Since it has no intermediary banks involved, the time required for payment processing is too short. You can compare it to the way UPI works, the difference being that UPI operates on the basis of funds in a bank account.

4. Transactions in digital rupees without the need to set up a bank account

To send or receive money through a digital payment system, you first need a bank account. This is how you are eligible to make digital money transfers to anyone at home or abroad.

This also applies to credit card transactions. However, CBDC India allows you to transfer money without any bank account. This will be a great initiative to promote digital banking products in places where banking facilities are low or zero.

5. Fast cross-border transactions

Depending on the payment method used, international transactions can take anywhere from 2 days to 1 week with limited updates. Faster foreign exchange transfers at affordable prices have long been a requirement for businesses.

In addition, personal remittances related to higher education, travel, donations and online business transactions will also benefit.

The digital rupee will help Indian payers send money to other countries in less time, just as they do in real time in US dollars.

6. Only digital rupees of the Reserve Bank of India are not subject to tax controls

The Indian government has imposed a tax of 30% on any virtual assets owned by its citizens. This applies to cryptocurrencies, Bitcoin, Litecoin, XRP, etc. Digital rupees issued by the Reserve Bank of India will not have this heavy tax burden.

In addition to these benefits, CBDC can help reduce the cost of printing and storing physical cash and our dependence on it.

What are the implications of the digital rupee for India?

The implementation of the digital rupee has had different impacts on different groups of people. What is the impact of this new product on the Indian economy, businesses and consumers?

Impact on the Indian economy

After all, mass production of physical cash is not viable in the long run and cannot cope with growing consumer activity. This is where digital payment systems and digital currencies come into play.

This year alone, about Rs 4,800 crore has been spent on making notes, storing them and transferring them securely. The Reserve Bank of India hopes to avoid this cost with the advent of digital currency options.

The secure co-existence of digital rupees, physical cash and other digital payment apps can boost the Indian economy while providing multiple options and opportunities for personal and business payments.

Unlike cryptocurrencies, India's digital rupee will also create a secure and stable payments environment with the necessary controls and regulations.

Impact on Indian businesses

Businesses can now try another payment method. For them, the primary consideration is a cost-effective and fast money transfer system.

Nowadays, almost every business transaction takes place online. They no longer prefer cash as a secure method of transaction. This is because of the following reasons.

Limited facilities to transfer funds to vendors from different locations Cash may be damaged, torn or stolen Accounting will be more complex than ever before. Counting, handling and storing cash will require separate attention Vulnerable to money laundering and other fraudulent activities

All these drawbacks can be overcome by using digital rupees. Even if the digital currency is hacked, the source of the offence can be identified.

Unlike cash payments, which are difficult to track, digital currency can be tracked and centrally managed. It also helps to maintain accurate accounting records without the need for burdensome data entry tasks.

As a result, users can minimise the risks associated with fraud and settlements. Settlement risk is the risk that you will not be able to transfer funds instantly and eventually lose track of them.

Similar to the way BHIM UPI inflates sales for small and local businesses, users can expect another digital payments boom for businesses.

Impact on Individuals in India

The Reserve Bank of India does not intend to stop or change the existing financial ecosystem as it is already performing better than expected. UPI payments alone have grown by 1,181 TP3T this year, creating a digital boom.

Now, digital rupees will be another icing on the cake, offering customers an additional way to send money. Presumably, digital rupees will be offered as another option in their digital payment app.

Customers without bank accounts and financial literacy can send and receive money through digital rupees. Employees can receive part of their salary through digital cash.

There are many such use cases. As the project is still being trialled, the impact on individuals is still not fully apparent.

Traditional rupee to be replaced by digital rupee?

After the devaluation of the currency and increased demand for cash, it is clear that the Reserve Bank of India will not replace physical cash, but rather allow it to co-exist with digital currencies. Their motto is to introduce a secure alternative to private digital currencies that they can regulate.

When the curtains are fully drawn on the digital rupee, India will have its own CBDC, which is safer than cryptocurrencies and other digital currencies.

While the digital rupee promises faster operations, scalability, liquidity and anonymity, there is still a big question mark over its ability to replace traditional payment mediums like cash and credit cards.

Businesses, cities and tech-savvy customers will embrace and use CBDC. however, it will still take time to build this system among the broader population that needs to get used to digital banking products.

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