What is Digital Rupee and How Does it Work?

The highly anticipated Digital Rupee’s pilot kicked off on 1st December 2022. The very thought of a completely cashless society is exciting. But, what exactly is the Digital Rupee or "e-rupee"? 

The e-rupee is basically an electronic version of cash. The denominations of the e-rupee would be the same as that of your paper currency. All your 1’s, 2’s, 5’s, 10’s, 100’s, 200’s, 500’s and 2000’s would be available as e-rupees to you. This Central Bank Backed Digital Currency Retail (CBDC)  will initially be available to a selected group of people to test out the feature and will be distributed by 9 main banks in 4 cities - Mumbai, New Delhi, Bengaluru, and Bhubaneswar. 

The e-rupee works as a token, and each token has a token holder. Whoever holds the token is presumed to own it and anybody must accept it as a form of currency when offered. That is, nobody can disagree to accept your e-rupees when offered as an alternative to cash!

Your e-rupee tokens would be available in your digital wallets offered by the banks, thus making it easier to access them via any device. Users can scan QR codes and use digital wallets to facilitate transactions. The pilot would allow users and merchants to interact via digital wallets. Merchants would have specific QR codes.

With the digital rupee, you wouldn’t need to carry your wallet everywhere. All you’d need is your phone to scan the QR code and bam! You’ve paid for your groceries! It is also interoperable between bank accounts, making it all the more easier to shift accounts, especially when it’s the end of the month and you need to tighten the purse strings!

The Digital Rupee provides the same advantages as your usual paper notes but stands apart from it as it can easily be converted into other forms of money. This doesn’t mean you’d get money in hand rather, it can be converted to cash in commercial banks. However, it doesn’t generate any interest. The technology would also drive transaction costs to an all-time low. With the onset of digital currency, the dependency on physical currency would decrease and thus the cost of printing would also come down. 

Just because it's a form of digital currency, the e-rupee is not to be mistaken for cryptocurrency. Cryptocurrency works on encrypted algorithms, while the e-rupee is simply digital money. It’s controlled by the government, which ensures its security. Not to mention, the e-rupee has the same denominations as that of paper rupees and coins. 

The main difference between UPI and the e-rupee is that of the third party. While transacting via UPI, there’s an intermediate party - the bank. With the digital rupee coming into play, the bank isn’t involved anymore, similar to how it works when you use paper currency. While purchasing groceries using paper currency, there are only two parties involved in the transaction. This is also exactly how the e-rupee works too - your money goes from your wallet to his wallet. The only difference here is that your wallet is now inside your phone.

Now, although the digital rupee is supposed to complement the United Payment Interface (UPI), experts fear the former is going to undermine it as the UPI already enjoys success because of its easy-to-use method and Indians have got quite used to it. The UPI has created quite a stir in the Indian community what with even beggars carrying QR codes!

The graph shows that a majority of India has already availed themselves of this benefit and there’s a sharp rise in people dealing with UPI transactions. Because there's already a pretty handy tool (UPI) at arm’s reach, the conversion of people to the digital rupee is questionable. However, it’s too early to determine the success of the e-rupee and only time will tell if it’ll be a boon or bane to the Indian economy.