The Reserve Bank of India (RBI) in November announced its first pilot project of Digital Rupee for the retail segment. Nine central banks — including State Bank of India, Bank of Boroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, YES Bank, IDFC First Bank, and HSBC — will be participating in this project. The Digital Rupee is expected to be launched in some selected states for retail masses within a month. Here is how it can benefit retail customers in India.
What is Digital Rupee?
In simple terms, the Digital Rupee is the digital form of fiat currency, issued by RBI. The Digital Rupee will be legal and acceptable for retailers making large transactions in government securities. Even though the digital rupee would be virtual, just like cryptocurrencies, they are pretty different from each other and serve various purposes.
How is Digital Rupee different from cryptocurrency?
There are three critical differences between the digital rupee and cryptocurrencies.
Firstly, a digital rupee is issued and controlled by the RBI, whereas any central authority does not govern the cryptocurrencies.
Secondly, the infrastructure on which the digital rupee is built is a private and permissioned blockchain network. But, the cryptos use a permission-less open network.
Thirdly, the identity of the users of cryptocurrencies is anonymous. However, it is not the case with the digital rupee.
What are the features of the Digital Rupee?
> It will be issued by the central banks in alignment with the monetary policy.
> It appears as a liability on the central bank’s balance sheet.
> It must be accepted as a mode of payment, and legal tender, acting as a safe store of value for all citizens, enterprises, and governmental agencies.
> It can be freely converted into cash.
> It can be accessed even without a bank account.
> It can lower the cost of issuing money and making transactions.
How can the Digital Rupee impact retailers?
As mentioned, the Digital Rupee is a pilot project in which nine central banks would be participating. The primary intent here is to use it to settle inter-bank transactions effortlessly. Most businesses these days prefer online transactions over cash due to several reasons: regular cash can get damaged easily, it is difficult to maintain a record of cash, or money laundering. With the introduction of the digital rupee, most of these risks are negated. Even in case of any hack, it is possible to trace and identify it.
As physical cash moves from one party to another, it becomes difficult for governments to keep track of it. Also, sometimes there could be chances of error in accounting which can cause distress to the business. Here, digital currency would play a vital role in solving these significant problems.
Retailers can hold their digital currencies in their digital wallets, which could be similar to Paytm wallets. Another exciting thing about the Digital Rupee is that it can reduce settlement risk to nearly zero.
On the other hand, the most significant benefit for individuals is that with the Digital Rupee cross-border transactions would become more accessible than ever before. The digital rupee would be another mode of payment for purchasing goods and services. Like UPI or online banking, it would be another payment method for making transactions easier in real-time.
Adopting the digital rupee across the retail space could lead to India’s digital transformation.
Since cash placement and tracking are a challenge in India, a Digital Rupee can address them in the best way possible. After the Digital Rupee becomes part of our mainstream society, the existing digital and neo-banks would likely have an edge since they already have the necessary digital infrastructure.
It also helps the government save print, operational, and distributing costs driving India towards a cashless economy.
(The author is the co-founder and CTO of Mudrex, a global crypto-investing platform.)
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