What is e-rupee and what is the difference between cryptocurrency and CBDC?

As engaged in controlling inflation, RBI recently rolled out its first pilot test programme to review and improve the currency’s functionality. Reserve Bank of India launched its first digital rupee on November 1 for the wholesale segment. 

According to the Reserve Bank of India, this will help strengthen India's digital economy, making the payment system more efficient and preventing money laundering. The digital currency will be used for the settlement of government securities.

Nine banks have been identified to participate in this project. It includes the State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.

What is digital currency?

It is basically an electronic form of money that can be used in contactless transactions. Central Bank Digital Currency (CBDC) is a digital form of rupee issued by a central bank. 

As per RBI, “CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.” 

In Union Budget 2022, Finance Minister Nirmala Sitharaman already cleared that the RBI would be rolling out its digital currency soon. 

Types of CBDC

1. Retail CBDC (e₹-R) - It would be potentially available for use by all i.e., by the public. 

2. Wholesale CBDC (e₹-W) - It is designed for restricted access to select financial institutions.

Benefits of CBDC

1. It will benefit in reducing the transaction cost. Having a digitised currency will make it easier for government to access all transactions occurring within the authorised networks. 

2. It will help the government to control how money leaves and enter the country. Through CBDC, it is impossible to avoid the gaze of the government. 

3. It can neither be torn, burnt or physically damaged nor physically lost. It is more durable compared to physical notes. 

4. The use of the digital rupee is expected to make the interbank market more efficient. 

5. It will also help to reduce dependence on the dollar. 

Difference between CBDC and Cryptocurrency 

The foremost difference is that CBDC is centralised means it is controlled by RBI however Crypto is decentralised i.e., not linked to or regulated by any government. 

CBDC is a legal tender and can be kept in bank accounts while cryptocurrencies need to be stored in digital wallets.

CBDC is much safer as compared to Crypto because of the hand of the government in this. Cryptocurrencies such as Bitcoin, Ether and others are being used for money laundering, tax invasion and terror financing. 

RBI also announced that they planned to launch within a month, a digital currency for the retail segment as well as in select locations in closed user groups comprising customers and merchants.