Explained: E-rupee pilot and what we know so far

The Reserve Bank of India (RBI) on October 7 issued a concept note on the Central Bank Digital Currency (CBDC) explaining its features and the objectives behind its issuance in India. As the RBI expands the scope of the pilot launch, more specific features and benefits will be communicated over time.

The RBI defines the CBDC as "a legal tender issued by the Central Government in a digital form". "It is the same as a sovereign currency and is exchangeable one to one at par," the RBI says.

Based on the concept note, here is what we know so far:

** CBDC is a variant of Central Bank currency that is different from physical cash, which must be accepted as a medium of payment and is freely convertible against cash and commercial bank funds.

** The CBDC differs from existing digital money in India. Unlike digital currency, it will be a liability of the Central Bank and not the commercial bank.

** Depending on usage, the CBDC has two broad types - one meant for retail purposes (CBDC-R) and one for wholesale purposes (CBDC-W). CBDC-R is available for all consumers to use in the private sector whereas CBDC-W is meant for restricted access and use by financial institutions.

** CBDC can be structured as token-based or account-based. Token-based CBDC is a "bearer instrument", which means that whoever holds the tokens at a given point in time becomes the owner. However, for account-based CBDC, there is a need to maintain a record of all transactions in order to indicate ownership of the monetary balances.

** Another feature that sets the CBDC apart is the technical possibility of programming the money in a way that links to its end use. For instance, to ensure the specified end use, agriculture credit from banks can be programmed such that it is used only at input store outlets and nowhere else.

** The CBDC platform is expected to generate real-time data. Apt analysis of the Big Data generated from the CBDCs can assist in evidence-based policymaking.

** Direct and indirect are the two models for issuing and managing CBDCs. Under the direct model, the Central Bank holds the responsibility of issuing, account-keeping and transaction variation. Under the indirect model, the Central Bank and intermediaries both have roles to play. The Central Bank issues the CBDC through intermediaries. Consumer claims are managed by the intermediaries in the latter model since the Central Bank only handles the payments to them.

** Digital payments' huge reliance on online networks means there's an issue with access for many Indians as internet is not available in every part of the country. To deal with this challenge, the Central Bank is considering offline functionality for the CBDC so as to ensure widespread usage, especially in remote locations where internet access is a major hurdle.

With the announcement of the pilot launch of the e-rupee, the RBI also needs to put systems in place to ensure that the CBDC system participants are protected from cyberthreats.