Ref : https://indianexpress.com/article/business/permanent-deletion-transactions-e-rupee-anonymous-shaktikanta-das-9312058/

Why in the news?

Governor Shaktikanta Das said that permanent deletion of transactions can make the e-rupee or Central Bank Digital Currency (CBDC) become anonymous and make it at par with paper currency.

What is Central Bank Digital Currency (CBDC)?

1. CBDC is a digital form of traditional paper currency issued by central banks.
2. It maintains a one-to-one exchange rate with physical fiat currency, essentially being the digital equivalent.

A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver.

3. CBDC functions as electronic cash, offering a digital alternative to physical currency.
4. Primarily designed for retail transactions, CBDC caters to everyday purchases and payments.
5. It will potentially be accessible to a wide range of users, including individuals, businesses, and the private sector.
6. CBDC helps to provide access to safe money for payment and settlement.
7. As a direct liability of the central bank, CBDC is under its direct control and management.
8. CBDCs, or digital fiat currency, can be traded using blockchain-supported wallets.
9. While CBDC was influenced by Bitcoin, it differs from decentralised cryptocurrencies and digital assets.
10. CBDC is issued by the state and has legal tender status, unlike decentralised virtual currencies.

Objectives of Central Bank Digital Currency:

1. The primary goal is to reduce risks and expenses associated with managing physical currency, including dealing with worn-out notes, transportation, insurance, and logistics costs.
2. Additionally, the aim is to encourage people to use CBDCs instead of cryptocurrencies for transferring money.

Global Trends

• The Bahamas introduced its nationwide CBDC, the Sand Dollar, in 2020, marking it as the first economy to do so.
• Nigeria also entered the CBDC arena with the launch of eNaira in the same year.
• China made headlines by piloting e-CNY, a digital currency, in April 2020, becoming the first major economy to embark on such a venture.

Significance

1. Cross Border Payments

• CBDCs can make payments across borders faster, cheaper, and safer.
• With CBDCs, payments can happen instantly, saving time and money.
• Better cross-border payments can help everyone, from individuals to whole economies.
• These improvements can boost global trade, help economies grow, and include more people in the financial system.

2. Financial Inclusion:

• CBDCs can help move informal economic activities into the formal sector.
• This shift can improve tax and regulatory compliance.
• CBDCs can also help more people access financial services.
• By using CBDCs, more individuals can become part of the formal financial system.

3. Traditional and Innovative

• CBDCs can change how we view money by lowering costs of handling physical currency.
• CBDCs offer a mix of benefits:
  • They’re convenient and secure like cryptocurrencies.
  • They’re also regulated and backed by reserves, like traditional bank money.

Challenges in Adopting CBDC Across India

1. Privacy Concerns:

• The main concern is that central banks might collect a lot of data on user transactions, threatening privacy.
• Digital currencies won’t provide the same level of privacy as cash.
• Compromised credentials.

2. Disintermediation of Banks

• If many people switch to CBDCs, banks might have less money to lend.
• If e-cash is widely used and the RBI allows unlimited money in mobile wallets, weaker banks could have trouble keeping inexpensive deposits.

3. Other Risks:

• Technology becoming outdated quickly could be a problem for CBDCs, leading to expensive upgrades.
• Intermediaries might face risks as their staff need to learn how to work with CBDCs.
• There’s a higher risk of cyber attacks with CBDCs, so there’s a need for strong security measures which can be costly.
• Digital illiteracy.

Who can use the retail CBDC?

• A pilot project for retail CBDC will begin with select locations and banks within a closed user group (CUG) including customers and merchants.
• Initially, the pilot will cover four cities:

1.  Mumbai
2. New Delhi
3. Bengaluru
4. Bhubaneswar.

• Four banks will participate in the initial launch–

1. State Bank of India 
2. ICICI Bank 
3. Yes Bank
4. IDFC First Bank

• The service will later expand to include more cities: Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.
• Four additional banks—Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank—will join the project at a later stage.

How will the retail digital rupee work?

1. CBDC will be available in the same denominations as paper currency and coins, and banks will distribute it.
2. Users can conduct transactions using a digital wallet stored on their mobile phones and devices.
3. Transactions can be person-to-person (P2P) or person-to-merchant (P2M).
4. Payments to merchants can be made using QR codes displayed at their locations.
5. CBDC won’t earn interest and can be converted to other forms of money like bank deposits.
6. The RBI has divided the digital rupee into two main categories: general purpose (for retail) and wholesale.

Way Forward:

• Central banks need to keep working on CBDCs, with help from financial institutions, tech experts, and others.
• Moreover, countries should team up on CBDC projects because cross-border payments involve different rules and challenges.
• CBDCs must be super safe and protect people’s privacy. That means strong cybersecurity to stop hacking and fraud, plus rules to keep user data private and secure.