RBI to launch e-rupee pilot soon, can be based on token or account

E-rupee is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and will be accepted as a medium of payment, legal tender and a safe store of value, the central bank said.

The digital rupee would appear as a liability on a central bank’s balance sheet, the RBI said in a concept note.

“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,” the central bank said.

According to the RBI, e-rupee can be structured as ‘token based’ or ‘account-based’.

“A token-based CBDC is a bearer instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them,” it said.

In contrast, an account-based system would require maintenance of record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances, it said.

In a token-based CBDC, the person receiving a token will verify that his ownership of the token is genuine, whereas in an account-based CBDC, an intermediary verifies the identity of an account holder, it said.

Considering the features offered by both the forms of CBDCs, a token-based CBDC is viewed as a preferred mode for CBDC-R as it would be closer to physical cash, while account-based CBDC may be considered for CBDC-W, the RBI said.

It said CBDC-W could also be explored for the wholesale market for asset classes which are OTC and bilaterally or settled outside CCP arrangements – CPs and CDs and access to retail for buying assets such as G-secs, CPs/CDs, primary auctions etc bypassing the bank account route.

In the case of g-secs, if assets are also tokenised, this could be extended to non-residents to investment in domestic asset classes.

The RBI has been opposing private cryptocurrencies, stating that they are a threat to India’s macroeconomic and financial stability.

“Private cryptocurrencies which have currency-like character will undermine RBI’s ability to deal with issues of financial stability. It is my duty to say that cryptocurrency investors should be aware that they are investing at their own risk. They should also keep in mind that cryptocurrencies have no underlying, not even a tulip,” RBI Governor Shaktikanta Das had said earlier.

The implications of CBDC for monetary policy essentially depends on the way it is designed and its degree of usage. In particular, it would depend whether CBDC will be non-remunerated or remunerated and whether it would be widely accessible just like physical currency, or limited to wholesale customers such as banks — as in the case of central bank reserves.

It would also depend on whether it will be anonymous like physical currency or ownership will be identifiable, which leaves the trail of different entries.

The RBI’s concept note also throws more light on key considerations such as technology and design choices, possible uses of digital rupee and the issuance mechanisms. It examines the implications of introduction of CBDC on the banking system, monetary policy, financial stability, and analyses privacy issues

“The most widespread use and advantage of e-rupee was expected to emerge from the token-based variant in the retail segment,” the RBI’s working group had earlier said.

The RBI has been exploring the pros and cons of introduction of CBDCs for some time and is currently engaged in working towards a phased implementation strategy, going step by step through various stages of pilots followed by the final launch, and simultaneously examining use cases for the issuance of its own CBDC — digital rupee or e-rupee — with minimal or no disruption to the financial system, the central bank said.