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The Reserve Bank of India (RBI) is exploring technological solutions to keep retail transactions using the digital rupee ‘anonymous’.
Deputy Governor T Rabi Sankar said the central bank could also explore legal provisions to keep the transactions anonymous. It will weigh its options as things evolve but will ensure the anonymity of transactions up to a certain limit, which is a basic feature of cash transactions.
At a post-monetary policy press conference, Sankar said, “A fundamental feature of cash is anonymity. One of the reasons it is still being used in many developed countries to a large extent is because of the anonymity it provides.”
“How anonymity is to be ensured in the case of a digital currency… because the normal understanding is that anything digital leaves a footprint…can have various solutions. We are firstly looking at a technological solution. We understand there are technologies possible to do that,” he said.
The basic distinction between Unified Payments Interface (UPI) transactions and digital rupee transactions is that UPI is a payment mode, which involves the intermediation of banks, and the digital rupee is money. So, all UPI transactions hit banks’ core banking solution (CBS). But in the case of a digital rupee, once the money is withdrawn from the bank and reaches the customer’s wallet, the transaction that takes place following this process is essentially a transfer of money between two wallets.
Experts have suggested that when a bank transfers the digital cash to a central bank digital currency (CBDC) wallet, that transaction is recorded in the core banking solution (CBS) because it is similar to when a person withdraws money from the bank. However, when transactions are made from one CBDC wallet to another, this leg of the transaction is not recorded in the CBS of the bank, and remains anonymous — the same as physical cash.
Governor Shaktikanta Das said, “The amendment to the RBI Act as regards CBDC says that currency will also include digital currency. In all respects, there is no difference in the eyes of law between paper currency and a digital one. The income-tax department has certain limits on the withdrawal of cash and payment in cash, whereby beyond a certain limit an individual has to furnish his/her permanent account number. So the same rules will apply in the case of CBDC as well.”
The RBI’s initial CBDC pilot projects are aimed at ensuring efficacy of all systems.
Sankar said digital rupee is money and hence, its use cases can be many more. “It depends on our start-up culture and financial technology ecosystem on the kind of payment channels they come up with using the e-rupee as base,” said Sankar.
In a speech last week, Sankar said the RBI felt the need to come up with a digital currency after it observed an environment in which the evolution of private currencies was posing a threat to investors, systems, and the economy.
“If there is anything a private cryptocurrency can do, we should be able to create a product that will do that without the associated risks, albeit in a safer format in fiat money backed by the government and issued by the central bank. This is essentially what we are doing in the CBDC experiments,” he had said last week.
The initial response to the retail pilot (CBDC-R) has been enthusiastic, with a total of Rs 3-crore digital currencies across denominations issued to four participating banks in the first two days.
Currently, specific use cases of person-to-person and person-to-merchant transactions are being tested in the retail pilot.
The digital rupee is helping individuals to hold and transact risk-free central bank money in digital form. Akin to cash, it does not carry any interest but provides the option of recoverability in the case of loss of the digital rupee.
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