Digital Currency

All about Retail Central Bank Digital Currency

(Part I)

What are the different kinds of Central Bank Digital Currencies?

• Central Bank Digital Currencies can be classified as Wholesale Central Bank Digital Currency (CBDC-W) and Retail Central Bank Digital Currency (CBDC-R)
• Wholesale Central Bank Digital Currency is that variant of CBDC, designed for wholesale purposes (as against retail use) such as for payment and settlement between commercial banks (such as for interbank settlement) or between central banks (such as for cross border settlements) or between commercial banks and central banks (such as for clearing settlements). Features of Wholesale Central Bank Digital Currency are designed for restricted use by financial institutions and central banks. Main objectives of introducing Wholesale Central Bank Digital Currency include improving inter-bank settlement efficiencies and reducing settlement risk.
• Project Jasper and Project Ubin are examples of Wholesale Central Bank Digital Currency pilots being conducted in Canada and Singapore, respectively.
• Retail Central Bank Digital Currency is that variant of CBDC which is designed for retail purposes such as for payments/remittances by individuals, corporate, and other institutions for trade and personal purposes

How is Retail Central Bank Digital Currency (CBDC-R) different from UPI?

• Retail Central Bank Digital Currency is equivalent to cash (fiat currency) and is a direct claim on the Central Bank. In other words, it is a legal tender issued in a digital form (instead of currency notes). UPI is an instant (real-time) payment system and does not represent any claim on the Government.
• Retail Central Bank Digital Currency would appear as a liability directly on the central bank’s balance sheet. UPI transactions would happen through customer accounts which get reflected in a commercial bank’s balance sheet as liability.
• In a Retail Central Bank Digital Currency transaction, there is no intermediation of a bank; Retail Central Bank Digital Currency would get transferred from wallet of one person to another directly. This means, like a cash transaction, Retail Central Bank Digital Currency can get transacted between two private individuals without involvement of a bank. In a UPI transaction, two banks (payee’s and recipient’s) are always involved.
• In the Core Banking System (CBS) of a bank, a Retail Central Bank Digital Currency transaction would be recorded as akin to a cash deposit/withdrawal, that is end use would not get captured. This feature ensures anonymity of a Retail Central Bank Digital Currency transaction. In contrast, a UPI transaction is recorded with the end-use transaction details (like for example a merchant payment).
• Retail Central Bank Digital Currency transactions would happen through a designated wallet. The wallet must be loaded from the customer’s bank account (that is, cash has been withdrawn digitally, in this case). UPI transaction does not require a wallet
• RBI’s Governor’s explanation is worth a watch on this topic

What are the design considerations for a Retail Central Bank Digital Currency?

• Ease of use: Retail Central Bank Digital Currency should be easily useable to promote wide adoption with no transaction costs
• Fungibility: Denominations of Retail Central Bank Digital Currency shall be fungible between one another
• Anonymity: Retail Central Bank Digital Currency shall be adopted widely only if all the transactions are kept anonymous and do not leave a digital trail
• Interoperability: Retail Central Bank Digital Currency shall be interoperable amongst different banks and different channels (For example, Retail Central Bank Digital Currency should be withdrawable through ATMs, Phone Banking, and Internet Banking)
• Strong security and resilience: Retail Central Bank Digital Currency should be inherently be stable, resilient and should withstand digital attacks

What are the specific problems that Retail Central Bank Digital Currency would address?

• Reduce operational cost of Currency Printing & Distribution: It is estimated that every 100 rupee note, which has an average life of 4 years, 15–17% is spent on printing and distribution. This report estimates that cost of cash is as high as 1.7% of GDP for India. Even though cost of setting up the initial infrastructure is expected to be high, payoffs would accrue in form of lower operational expenditure as Retail Central Bank Digital Currency can be issued and distributed comparatively easily
• Soiled notes and Counterfeiting: Being a digital currency based on block chain technology, Retail Central Bank Digital Currency cannot be counterfeited and obviates the problem of soiled notes
• Accounting and Reconciliation: Accounting and reconciliation of Retail Central Bank Digital Currency, held at various consumption points, could be carried out on a real-time basis
• Wider choice for public: Public would have a wider choice for conducting transactions and can choose whichever is most appropriate

What is the progress so far on RBI’s pilot on Retail Central Bank Digital Currency?

• RBI launched the first pilot program for RBI’s Retail Central Bank Digital Currency (e₹-R) on December 01, 2022
• The pilot proposes to cover a closed user group (CUG) comprising select locations, banks, and retail users. Eight banks (SBI, ICICI Bank, Yes Bank, IDFC First Bank, Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank) would be participating in this pilot
• Denomination would be the same as that of notes and coins and would happen through select commercial banks
• Transactions can happen between person to person (P2P) or person to merchant (P2M)
• As per newspaper reports, Rupees 3 crore worth of e₹-R has been issued to banks for the pilot
• RBI is working on an off-line mode of transacting the e₹-R for the benefit of areas with poor network coverage
• Based on experiences from the pilot, a robust architecture for the e₹-R would be rolled out

Further Reading on Retail Central Bank Digital Currency

• CBDC architectures, the financial system, and the central bank of the future (https://cepr.org/voxeu/columns/cbdc-architectures-financial-system-and-central-bank-future)
• Concept Note on Central Bank Digital Currency by Reserve Bank of India (https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1218)