RBI Launches Digital Currency; How Is It Different From Cryptocurrency And UPI?

RBI Launches Digital Currency; How Is It Different From Cryptocurrency And UPI?

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  • Reserve Bank of India (RBI) launched the first pilot of the digital rupee on November 1, 2022

  • The project focuses on the settlement of secondary market transactions for government securities.

  • As per the statement by RBI, Digital Rupee will also be used for retail transactions soon. 

The Central Bank of India commenced the pilot launch of the Digital Rupee (e₹) on November 1, 2022. The pilot project will be used for issuing virtual currency for transactions in government securities. The pilot will see nine banks – ICICI Bank, Union Bank of India,  Kotak Mahindra Bank, State Bank of India, Bank of Baroda,  HSBC, HDFC Bank, Yes Bank, and IDFC First Bank.

What is Digital Rupee?

Digital Rupee or Central Bank Digital Currency (CBDC) is a digital form of legal tender issued by the central bank i.e. Reserve Bank of India (RBI). It is an electronic form of money that can be used for contactless transactions. 

Digital Currency

While presenting the Union Budget of 2022, Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) would be rolling out its digital currency soon. It will be based on the blockchain and related technologies. 

“Introduction of a central bank digital currency will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system,” Nirmala Sitharaman had said in her Budget 2022 speech.

Two Types of CBDCs

  • Wholesale CBDC

Wholesale CBDC is designed to be utilized by financial institutions such as banks which would ensure payments in a quicker and more automated manner. 

  • Retail CBDC

Designed for use by all the individuals in the country, Retail CBDC would ensure smoother and quicker retail transactions. 

How is Digital Currency different from Cryptocurrency? 

Cryptocurrency is a digital asset that is designed to work as a medium of exchange. It is not controlled by any intermediates like banks, central authorities, or financial institutions. Due to its decentralised nature, it has been controversial. Cryptocurrency has attracted a lot of popularity but is often questioned. The value of cryptocurrency is determined solely by free market forces.  

Unlike cryptocurrency, the digital rupee will be issued by the Central Bank and will therefore have sovereign backing. It is just like fiat currency and can be exchanged with the existing rupee in the market. The main difference that lies between the digital rupee and cryptocurrency is that the digital rupee is centralised while cryptocurrency is decentralised. 

How is Digital Currency different from UPI? 

The primary difference between Digital Rupee and UPI is that UPI is a payment processing tunnel while the digital rupee is a standalone payment mode. 

UPI transactions are involved between participating banks and they have their own UPI handlers while digital currency is directly operated by RBI and no commercial bank is involved in the process. Hence, it will make the record-keeping process much easier. 

In simple terms, people will not need banks in the case of digital currency. RBI will own the technology platform on which all the transactions will take place. Individuals will have an ‘address’ on the platform and will have a private key to ‘sign’ transactions. 

Benefits of Digital Rupee

  • Digital Rupee will be backed by RBI hence mitigating the risk of volatility. 
  • As opposed to currency notes, there would be no physical damage in terms of wear or tear or losing it during movement. 
  • The introduction of digital currency will streamline cross-border transactions by reducing transaction costs. Traders will not have to go through multiple layers of banks and can deal directly with each other. 
  • This will also speed up the account settlement process as the transactions could be entered in real-time. No need for updating the ledger at the end of the day.

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