5 Things to know about the e-Rupee

What is FUSS all about ?

With demonetization in 2016 , maybe we are in for another overhaul of the cash economy that we have grown so accustomed to and that is why it is important to know what this e-Rupee is all about.

The recent announcement by the Apex bank of India — RBI is that it will launch it’s e-Rupee in the market for it’s pilot phase, has intrigued people and has left many questions around it , because money is something that affects one and all.

The Pilot phase of the e-Rupee would be executed through a set of 4 banks in the first phase — State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank and in 4 cities — Mumbai , Delhi , Bengaluru and Bhubaneswar covering the 4 major parts of the country .

What is e-Rupee? How Will it Work ?

According to the government, from the consumer POV , the e-Rupee will work just as, one would use the paper currency in the current market. The e-rupee will be issued in the same denominations as followed by paper currency or coins. It is a digital token of paper money that will be distributed through banks as an intermediary. Despite being digital, the e-Rupee has all of the characteristics of a real currency, such as safety, settlement finality, trust, and so on. The e-Rupee is just like the physical cash sitting in your wallet and when a transaction happens, the money flows from your wallet to another person’s wallet .

Transactions made by e-Rupee can be both person to person (P2P) and person to merchant (P2M) . There would be 2 kinds of e-Rupee — CDBC-R for the retail consumers like Non-financial consumers, private sectors, businessmen, etc. while CBDC-W would be restricted to selected financial institutions such as interbank transfers.

People would be able to transfer the money seamlessly just by scanning a QR code and initiating the transactions. All these would be done via an app on your phone seamlessly , even in areas where internet connectivity is not stable. But given the lack of stable digital infrastructure in some areas of the country , it would really be a challenge to implement the E-Rupee in such areas for the apex bank.

How is it different for UPI?

UPI is a payment interface/enabler that helps users to transfer money in their respective banks to one another ( P2P and P2M ) . For any UPI we would have 4 stakeholders involved in each UPI transaction made.

The Stakeholders are:

1. The Consumer
2. The Consumer’s Bank ( For e.g. — HDFC Bank )
3. The Merchant
4. The Merchant’s Bank ( For e.g. — ICICI Bank )

As shown in the graphic , whenever a UPI transaction is initiated , the money in the consumer’s bank account is transferred to the merchant’s bank account , and this means that there is active involvement of the intermediary banks — HDFC bank and the ICICI Bank . Each Transaction is monitored and can be tracked by the banks as well the RBI.

UPI at a glance

But , in an e-Rupee Transaction , the banks are not at all involved , it is just 2 wallets — the consumer’s and the merchant’s among which the e-Rupee is transferred seamlessly.

Differences between UPI and E-Rupee

Why now , when we already have UPI ?

There are multiple reasons for the government to issue their own CDBC i.e. e-Rupee into the Indian market.

1. With Cryptos and blockchain gaining traction due to it’s decentralized nature and the many associated benefits like the transactions being fast, secure, anonymous etc, the government is sensing an imminent risk which could lead to potential loss of control over the finances of the country . There are multiple reports that suggest that governments want to stay ahead of such times to come and launching a central bank digital currency like the e-Rupee is an attempt by the GOI to stay in the pecking order of digital currencies
2. Cost effectiveness and reducing operational challenges is also something that RBI had in its mind while launching the e-Rupee. It’s well known that each note that gets printed by RBI incurs a cost and then transporting the same across the length and breadth of the country is another logistic cost that the country has to bear , with e-Rupee , such costs could be expected to diminish over the long run , given that significant investment is required by RBI to effectively launch the digital currency in the short run.
3. The introduction of e-Rupee is intended to strengthen the digital economy and improve the efficiency of the interbank market. It will also assist establish the governance paradigm that may be necessary for a larger-scale launch. During the pandemic, the continuous increase of digital payments was a strong sign of the growing desire for legitimate digital alternatives to Indian money. Furthermore, the G20 has prioritized improving cross-border payments; thus, faster, cheaper, more transparent, and more inclusive cross-border payment services would provide widespread benefits to citizens and economies worldwide, supporting economic growth, international trade, global development, and financial inclusion.

What is the current status and what should a normal consumer do ?

The pilot launched by the RBI would cover select locations in a closed user group (CUG) including some commercial and retail consumers in select cities and with select banks.

According to the Apex bank, the pilot would assess the resilience of the entire process of creating digital rupees, distributing them, and using them in retail in real time. “Based on the results of this pilot, further features and uses of the e-R token and architecture will be tried in future pilots.”

For the common man , it is still a “Wait & Watch” situation to see where e-Rupee is headed and how RBI can implement it effectively across the country.