Digital Rupee

Context

The Reserve Bank of India (RBI) commenced a pilot launch of the digital rupee from November 1. 

• It has identified nine banks for participation in the pilot launch.
  
  

What is Digital Rupee?

• A Central Bank Digital Currency (CBDC) or Digital Rupee is a digital form of currency notes issued by a central bank.
• It is an electronic form of money that can be used in contactless transactions. 
• It can be defined as the legal tender issued by the Reserve Bank of India.
• Background: Presenting Union Budget 2022, the Finance Minister announced that the Reserve Bank of India (RBI) would be rolling out its digital currency soon.
• Types : CBDC can be classified into two types:
• Retail (CBDC-R): Retail CBDC would be potentially available for use by all
• Wholesale (CBDC-W) is designed for restricted access to select financial institutions.

Benefits

• The digital rupee system will "bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient." 
• It will reduce the transaction cost, having a digitised currency will make it easier for governments to access all transactions happening within the authorised networks. 
• The lifeline of a digital currency will be indefinite compared to physical notes.
• "CBDC is aimed to complement, rather than replace, current forms of money and is envisaged to provide an additional payment avenue to users, not to replace the existing payment systems.

Risks in adopting digital currencies

• Cyber hacks and threats
• Threat to privacy

Difference between digital rupee and cryptocurrency

• A cryptocurrency is a decentralised digital asset and a medium of exchange based on blockchain technology. However, it has primarily been controversial due to its decentralised nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities. 
• On the Contrary, Central Bank Digital Currency (CBDC) issued by the Reserve Bank of India (RBI) will be a legal tender in a digital form.
• The digital rupee will be different from Bitcoin, Ethereum and other cryptocurrencies in the sense it will be backed by the government. 
• Secondly, having an intrinsic value on account of government backing, the digital rupee will be equivalent to holding a physical rupee equivalent.