The Comprehensive Guide to India’s e-Rupee Initiative

As you might know, India is making a big step toward a digital future with the launch of the e-Rupee, a digital version of its national currency. The work on this project of major importance is actively ongoing, with two pilots already having aired in the wholesale and retail sectors in November and December 2022, respectively.

This exhaustive guide provides a detailed overview of the digital Rupee initiative, its goals, and its potential impact on the country and its citizens. Whether you're a financial expert or simply someone looking to learn more about the future of money in India, this guide is for you - read on not to miss out on all the details.

Introducing the e-Rupee: Top 5 Questions Answered

India’s Central Bank Digital Currency (CBDC) is set to revolutionize the country’s payment industry, so it comes as no surprise that it has been a prominent topic of discussion lately. In this section, we’ll address some of the most common questions asked about the digital Rupee to help you understand what exactly this payment initiative is all about.

What Is India's e-Rupee?

The e-Rupee is India's digital version of its national currency, the rupee (₹), backed by the Reserve Bank of India. It aims to provide a seamless, secure, and modern mode of payment for citizens and organizations. The digital Rupee can be used for various transactions, such as online payments, peer-to-peer transfers, bill payments, and beyond.

What Is the Meaning of the e-Rupee?

The e-Rupee represents a significant shift towards a cashless economy in India, enabling citizens to transact and make payments digitally. It also offers various benefits over cash, like faster and more convenient transactions, improved security, and better reporting. Overall, it’s seen as a critical step toward a more transparent and efficient financial system.

What is the Difference Between the e-Rupee and Digital Currency?

Many believe that the e-Rupee concept is different from that of any other digital currency due to a lack of understanding or awareness about its nature and capabilities. However, in reality, the e-Rupee is a type of digital currency that is issued and regulated by the Indian government.

What Are the Key Objectives of Launching the Digital Rupee?

Some goals set by the e-Rupee initiative are:

• The promotion of financial literacy and inclusion
• A reduction of cash dependence
• An increase in the transparency and efficiency of the financial system
• Providing a secure and seamless mode of payment for citizens and businesses

By achieving these objectives, the e-Rupee is poised to drive the evolution of India's economy.

Can the Digital Rupee Replace Cash?

It's possible for a digital currency like the e-Rupee to partially or completely replace physical cash, depending on such factors as government policy, infrastructure for digital transactions, and the level of trust and adoption by the general public. However, the full transition to a cashless society in India is likely to take many years to fully achieve.

What Are the Reasons That Prompted the Idea of the e-Rupee?

In 2020, the pilot launches of the digital rupee project followed to test its functionality and identify any challenges that need to be addressed. Some of the main reasons for this initiative coming to life include:

• Increased demand for digital transactions. As more people are relying on digital payment methods, there is a growing need for a secure, efficient, and accessible system to facilitate them.
• Provision of payment service for underbanked and unbanked populations. The launch of a digital rupee offers a solution to the major issue related to the lack of financial inclusion in India.
• Reduction in the dependence on cash transactions. The e-Rupee is expected to reduce India’s reliance on cash, which, in turn, is forecast to minimize the instances of corruption, decrease the costs of issuing and circulating banknotes and coins, as well as to stimulate economic growth.
• Improving the financial system’s stability. By providing a secure and efficient payment system, the digital rupee is expected to improve the overall stability of the country’s financial industry.
• Keeping up with technological advancements. The launch of the e-Rupee is seen as a way for India to keep up with the latest technological advancements and maintain its competitiveness in the global market.

The implementation of such a massive project requires the synchronization of a variety of processes and a strong technological basis to back it up. Read ahead to learn more about the software behind the e-Rupee project.

Technology Behind India’s CBDC: How Does the e-Rupee Work?

In a parliamentary session held in December 2022, Finance Minister Pankaj Chaudhary revealed that the digital rupee, which is currently still in its trial phase, incorporates components based on blockchain technology.

The official stated that the e-Rupee is part DLT (Distributed Ledger Technology) and part API (Application Programming Interface). However, it’s important to note the API used in the digital rupee is allegedly not linked to any blockchain, making the connection between the two elements unclear as of now.

The authorities are continuously trying various tech solutions with the goal of finding the best option to meet the needs of India's population. The Finance Minister also mentioned that the e-Rupee is being tested in a closed user group, with a limited number of participants, to evaluate every aspect of the technology, from creation to usage.

It’s reported that the trial phase is held in Mumbai, New Delhi, Bengaluru, and Bhubaneswar and is proceeding well. Moreover, it is expected to be gradually expanded to other cities and involve a larger number of users in the foreseeable future.

The e-Rupee is Partly Based on DLT - Is It a Cryptocurrency?

In fact, there are multiple differences between CBDCs (including the e-Rupee) and cryptocurrencies, namely:

• Issuance and regulation. CBDCs like the e-Rupee are centralized, meaning that transactions are recorded and verified by a central authority, such as the RBI. Cryptocurrencies, on the other hand, are decentralized, meaning that financial operations are verified and recorded by a network of users.
• Privacy. Even though the e-Rupee will offer a higher degree of anonymity than India’s existing payment systems, it may not offer the same level of privacy as cryptocurrencies. Central banks would have access to information about transactions and users and may be required to share that information with government agencies.
• Volatility. The e-Rupee is likely to be less volatile than crypto, as its value is backed by the issuing central bank.
• Legal status. While the legal status of cryptocurrencies varies from country to country, CBDCs, including the digital rupee, are considered legal tender by definition.

Thus, the digital rupee project has a lot less in common with cryptocurrencies than it may seem at first glance.

What Makes the Digital Rupee Secure?

Due to the somewhat unclear technology behind the novel CBDC, some citizens are concerned regarding its security. However, experts assure that there is nothing for users to worry about, as the e-Rupee is designed to be an improved digital version of the Indian currency, and there are several measures in place to ensure its security:

• Centralized issuance and regulation. The e-Rupee is issued and regulated by the Reserve Bank of India (RBI), which gives it the backing of the Indian government and ensures that it is in compliance with all relevant laws and regulations.
• Advanced encryption. Digital payments made with the use of the e-Rupee are protected by state-of-the-art encryption technology, which helps to prevent unauthorized access and ensures the confidentiality of transaction details.
• Sophisticated authentication. The e-Rupee system is expected to feature strong authentication measures, such as biometric authentication or one-time password (OTP) generation, to prevent unauthorized access to digital wallets.
• System monitoring. The RBI will be closely monitoring the e-Rupee system to detect and prevent any fraudulent activity.
• Dispute resolution. The e-Rupee system is likely to have convenient mechanisms for dispute resolution and complaint management in place to ensure that any issues arising from the transactions can be resolved efficiently.

During its trial phase, the e-Rupee project is sure to refine its security mechanisms to strike the best possible balance between user convenience and the protection of payment data and funds.

Is the e-Rupee Different from UPI & Other Payment Systems?

Now that you have a general idea about the e-Rupee, let’s discuss how it’s different from other payment platforms available in India. The solutions that are the most prominent nationally are:

• UPI (Unified Payment Interface). This is a platform for instant bank-to-bank money transfers introduced by the National Payments Corporation of India in April 2016.
• NEFT (National Electronic Funds Transfer). Yet another Indian payment system that facilitates interbank transactions. However, unlike UPI, NEFT processes transactions in batches rather than instantly.
• RTGS (Real-Time Gross Settlement). It’s an Indian payment system that facilitates the transfer of large-value transactions between banks in real time. It’s specifically designed for high-value transactions, with a minimum amount set at ₹2 lakhs (200,000 rupees) by the RBI.

As you can see, all three of these are similar to an extent yet have some core distinctions, which make them essential elements in India’s payments ecosystem. But what are the characteristics that will make the e-Rupee make a valuable contribution? Here are the key qualities that set the digital Rupee apart from the existing national payment systems in India:

1. It Is a Legal Tender Rather Than a Payment Medium

The e-Rupee is a digital form of India's sovereign currency, unlike payment mediums such as UPI, PhonePe, NEFT, and RTGS, which are simply methods of transferring funds.

According to Rachit Chawla, CEO of Finway FSC, "The key difference is that while UPI transactions are backed by a physical currency, the e-Rupee operates as a legal tender without the support of a physical currency."

2. It Doesn’t Require Banks As Intermediaries

Unlike UPI, NEFT, or RTGS, the e-Rupee allows for direct transfers from one wallet to another without the involvement of a bank. According to RBI Governor, Shaktikanta Das, the process of using the digital rupee is similar to using physical currency.

To pay somewhere with cash, a person takes banknotes or coins out from their wallet and spends them without any third party’s interference required. In the case of the e-Rupee, the procedure is similar, with the only distinction that the funds are accessed via a mobile phone.

3. Its Functionality Goes Beyond Payment Transactions

Experts agree that as the e-Rupee initiative continues to evolve, it will involve multiple additional use cases beyond traditional payments, including embedded finance, instant lending, and trade finance.

4. It Provides More Anonymity

The use of the digital rupee is forecast to result in more anonymous transactions compared to those conducted through existing digital payment methods.

In the case of UPI, NEFT, and RTGS, digital transactions happen between two bank accounts and can be easily traced by regulatory intermediaries. However, the anonymity aspect of cash is a fundamental feature, so the central bank made sure that this characteristic persists in digital rupee payments.

Therefore, even though e-Rupee transactions are recorded in the centralized ledger, they will remain reasonably anonymous.

5. It Has Different PAN Requirements

Presently, individuals making cash transactions exceeding a certain amount are required to provide their PAN number, which is a 10-digit unique alphanumeric code issued by the Indian Income Tax Department. The same rule will also apply to digital rupee transactions, as they are considered equal to physical currency.

What’s more, the State Bank of India (SBI) has established a wallet holding limit for e-Rupee users that equals ₹1 lakh. Besides, one can load or withdraw up to ₹25,000 and make up to 20 inward and outward transfers in a single day. Additionally, users can pay or collect up to ₹10,000.

These conditions differ from the current UPI thresholds, as the maximum limit per transaction applicable to them is ₹2 lakh, though this may vary depending on the bank.

CBDC Functionality: What Will It Be Like for e-Rupee Users?

As you already know, the digital rupee is currently undergoing the pilot phase in the retail and wholesale sectors, so it is not yet clear how exactly it will work for users. However, based on the information available about other CBDCs, it is possible to form some assumptions regarding the e-Rupee’s functionality.

For retail consumers, the e-Rupee is likely to be accessible through a digital wallet, similar to a mobile banking app. Users may be able to download the wallet to their smartphones or other devices and use it to store, send, and receive digital currency. It is likely that in-person transactions will be completed using QR codes or near-field communication (NFC) technology.

For wholesale users, the e-Rupee may operate as a digital version of traditional wholesale bank deposits.

It is important to note that this information is speculative, and the actual functionality of the digital rupee may differ. After all, the outcome of the retail and wholesale pilot phases will determine how the e-Rupee will work for users, should it be implemented on a full-scale basis in India as planned.

Current Challenges in Digital Rupee Adoption

The adoption of the e-Rupee, like any new technology, faces several challenges that must be addressed to ensure its nationwide success. Here are the key factors that must be kept in mind:

• Lack of awareness. There is a need to raise awareness and educate the general public about the benefits and use cases of the e-Rupee. This also includes the promotion of information about more general concepts, such as digital wallets and online transactions.
• Infrastructure and accessibility. To fully realize the potential of the e-Rupee, it is important to have the necessary infrastructure in place, such as a reliable internet connection and the availability of digital wallets and payment systems. This can be a challenge in India’s rural and remote areas, where access to technology is limited.
• Security concerns. Despite the security measures in place, there are still concerns about the security of digital transactions and the potential for fraud. This can be an obstacle to the technology’s adoption for some people, especially those that are currently not engaging in online payments.
• Resistance to change. Drastic changes can be difficult for some people, so there may be resistance to adopting the e-Rupee due to a preference for traditional methods of payment and banking.
• Regulation and standardization. The digital rupee is regulated by the Reserve Bank of India (RBI), but there may be a need for further regulation and standardization in the payment industry and tax regime to ensure the initiative’s widespread adoption.
• Competition. Even though the e-Rupee is a governmental initiative, it still faces competition from other digital payment methods, such as mobile wallets and UPI, as well as traditional forms of payment like cash and cheques.

The successful adoption of the e-Rupee will require overcoming the challenges listed above through continuous improvement across a variety of spheres, ranging from spreading awareness to advancing security measures.

What's the Significance of the e-Rupee in the International Context?

The potential impact of the digital rupee extends way beyond India. In fact, the initiative is likely to have worldwide influence through the following aspects:

• Improved cross-border transactions. The e-Rupee system is predicted to have all that it takes to make cross-border transactions faster, cheaper, and more efficient by reducing the need for intermediaries.
• Competition among payment systems. The introduction of the digital rupee may lead to increased competition across international payment systems, potentially prompting lower costs and improved services for users.
• Impact on global currencies. The success of the e-Rupee could inspire other countries' efforts to introduce digital currencies and could result in the adoption of similar CBDC systems by other central banks worldwide.
• Effects on the role of banks. The widespread adoption of digital currencies, such as the e-Rupee, could result in drastic changes in the role of traditional banks in the global financial system.
• Global sustainability benefits. The use of digital currencies, the e-Rupee included, reduces the need for physical cash, therefore reducing the manufacturing volumes of paper currency, which is often produced out of materials that are not sustainable in the long term.
• Influence on international financial policies. The introduction of the e-Rupee, alongside other digital currencies, is likely to influence central banks' financial policies regarding international transactions.
• Simpler currency conversions. Digital currencies, including the e-Rupee, can be easily converted into other digital currencies or fiat currencies using online exchange platforms. As the adoption of CBDC initiatives grows, it can make cross-border transactions faster, more efficient, and less costly compared to traditional methods.

These are just some of the potential impacts of the digital rupee in the international context, and it is sure to be exciting to see how these developments unfold in the future.

What’s in Store for the Digital Rupee Project Moving Forward?

There are several key factors that will likely influence the direction of the e-Rupee developments moving forward:

• Regulatory environment. The regulatory framework for digital currencies, including the e-Rupee, is rapidly evolving worldwide. Thus, it will be important for the Indian government and the Reserve Bank of India (RBI) to develop comprehensive local guidelines as well as to ensure that the digital rupee complies with applicable international laws and regulations.
• Market demand. Ultimately, the success of the digital rupee project will depend on the level of demand from consumers and businesses. Thus, the authorities will need to focus on ensuring that all the relevant stakeholders are well-informed about the project’s goals and capabilities and are in tune with its latest updates.
• Competition. The digital rupee project is facing competition from other digital currencies and payment methods, both domestically and internationally, so it will be important for the RBI to ensure that the e-Rupee remains competitive in terms of features, security, and costs.
• Technology. The e-Rupee initiative will likely rely on advanced solutions, including blockchain and other digital ledger technologies, and it will be critical for the RBI to make sure that they are secure, scalable, and able to meet the demands of the market.

All in all, the RBI intends to further enhance and refine its approach by utilizing India’s robust digital infrastructure and building upon the insights gained from the e-Rupee’s pilot launches.