Digital Rupee & How It Works – Forbes Advisor INDIA |

The Reserve Bank of India is set to launch the pilot of its central bank digital currency (CBDC), which it categorizes as legal tender in a digital form. Commonly known as the digital rupee, it will be exchangeable at par with existing currencies and will be considered acceptable for payments and a safe store of value. 

Also being called the e₹ or the digital rupee, CBDC issued by the RBI is aimed at creating an additional option to use money and isn’t very different from the currently-issued banknotes; only the digital rupee is expected to be transacted digitally and facilitate ease of use. 

The digital rupee is the RBI’s accepted version of cryptocurrencies, which the central bank has dismissed repeatedly and called a serious challenge to the stability of the financial system of the country. 

Being an electronic form of sovereign currency, the CDBC is being touted as safer than private cryptocurrencies and here’s how the both will differ. 

What is Cryptocurrency? 

In simple terms, cryptocurrency is decentralized money, free from any government or central bank’s chains. It relies on blockchain technology and uses cryptography to secure transactions done by people making it impossible to counterfeit.

However in August 2010, a hacker found a loophole in the Bitcoin protocol. The hacker exploited the vulnerability and created an infinite amount of Bitcoins by making multiple transactions before logging them into the blockchain. 

The user created 184 billion Bitcoins in a few hours, but his plot was discovered, and the transactions were invalidated. To date, this has been the only threat to the Bitcoin network. 

The purpose behind the creation of Bitcoin was to help people send money over the internet. It is a digital currency, an alternate payment system free from any control that works exactly like traditional currencies. 

To better understand cryptocurrency, you must know about the three terminologies: blockchain, decentralization and cryptography. 

  • Blockchain in cryptocurrency is the showrunner. It is a digital ledger whose access is distributed between authorized users and records transactions. 

The information and access are shared among the registered users. So, anything the blockchain records is transparent and immutable–the information cannot be tampered with or hacked. Not even by the administrator. 

  • Decentralization in cryptocurrency means that the asset is free from governing bodies like central banks. This mechanism makes cryptocurrencies independent. At the same time, the centralized money we use is monitored and managed by the RBI. 
  • Cryptography in cryptocurrency means secret writing, which means the recipient can only read messages. It takes care of the transactions, protects operational autonomy, and fortifies the entire chain. 

How Does Cryptocurrency Work?

All cryptocurrencies are generated through a rigorous process called mining. The miners use computers with high-end GPUs to solve various complex mathematical problems and puzzles to get cryptocurrencies as a reward. It takes days and even months to mine crypto. 

People can also buy cryptocurrencies from currency owners and exchange platforms, and they can even sell them to other individuals, too. The cryptocurrencies are stored in digital wallets, which are either hot or cold. A hot wallet is connected to the internet. In contrast, cold storage keeps your holdings offline.

Cryptocurrencies can be transacted or transferred using your smartphone – just like a UPI transaction. Users can also convert their crypto holdings to cash using their bank accounts or P2P transactions. 

Of course, while Bitcoin remains the popular choice for miners and investors, it did start a digital currency revolution that led to the birth of many popular currencies like Ethereum, Tether, XRP etc.

Cryptocurrencies are immune to any central authority or government interference. However, their relationship with the Indian government has been quite uncomfortable. 

  • April 2018 – People were warned that virtual currencies are not legal tender in India. The finance ministry appointed a committee to frame a bill for cryptocurrencies in India. But the ministry overruled the ban. 
  • In 2019 – A bill forbade mining, holding, selling, issuing, transferring and using cryptocurrencies. If found violating the law, people would pay a hefty fine or face imprisonment of up to 10 years. 
  • March 2020 – The ban was removed by the Supreme Court of India, 
  • November 2021 – Finance Minister Nirmala Sitharaman raised the topic of cryptocurrency in the Rajya Sabha. She said the government hadn’t taken concrete steps to ban cryptocurrency advertisements in India, but it’ll spread awareness through the RBI and SEBI. 
  • Union Budget 2022-23 – The government of India recognized cryptocurrencies and decided to tax 30% of any virtual asset. The FM also announced the launch of a CBDC called the digital rupee. 

But is digital rupee cryptocurrency? Here’s some context.

What Is Digital Rupee or Digital Currency?

A digital currency is any currency that is available entirely in electronic form. Currencies’ electronic types already predominate a large number of nations’ financial systems. Digital currency, however, is exclusively exchanged through virtual means and does not leave a computer network. 

The three major varieties of digital currency are cryptocurrency, central bank digital currency (CBDCs) and stablecoins.

The foundation of cryptocurrency is provided by blockchain technology which is the most usual form of distributed ledger used by digital currencies. According to CoinMarketCap, the availability of cryptocurrencies is more than 21,000. 

What Are The Advantages Of Digital Currency?

Here are some of the advantages of digital currency:

Faster Mode of Payment

Digital currency can make your payments much faster than current means like automated clearing houses or wire transfers that take days for financial institutions to confirm a transaction.

Cheaper Global Transfers

At times global transactions can get very expensive. Individuals are charged high fees to move funds from one nation to another, especially when it includes currency conversions. Digital assets could interrupt this market by making the transaction cost-effective and quick. 

24/7 Availability 

Digital currency transactions work at the same speed i.e. 24 hours a day and seven days a week. On the other hand, existing money transfers frequently take more time during weekends and outside normal working hours because banks are shut and cannot confirm transactions.

No Manufacturing Required

Physical currencies have many requirements such as the establishment of physical manufacturing facilities. Whereas, in digital currencies, no such expense is involved. Also, digital currencies are immune to soiling or physical defects that are present in physical currency. 

Well-organized Government Payments

If the government developed a central bank of digital currency, it could send payments like child benefits and food stamps, and tax refunds to people instantly, rather than trying to figure out prepaid debit cards or mail them a check.

What Are The Disadvantages Of Digital Currency?

Here’s a list of some drawbacks of digital currencies:


The crypto popularity is a downside. According to the head of Sidley’s FinTech and Blockchain group Lilya Tessler, across different blockchains, there are several digital currencies being created with their own limitations. 

It will take a certain amount of time to decide which digital currencies in certain cases might be appropriate to use.It also includes whether a few are designed to scale for mass adoption. 

Costly Transaction

Crypto uses blockchain technology where computers must resolve complex equations to validate and record transactions. This in turn takes a significant amount of electricity, the more the transaction the more the expense. 

However, this would probably not exist for the central bank of digital currencies as complex consensus processes are not required and CBDC would likely oversee it.

Steep Learning Curve

On the part of the user, digital currencies require work to learn fundamental tasks like how to open a digital wallet and securely store digital assets. For the wide adoption of digital currencies, the system needs to be simplified.  

Issues of Cybersecurity

The digital currency has made people constantly worry about cybersecurity and facing many threats due to less secure methods to store this money.  Cyberattacks are probably increasing and can also threaten digital currency users with virtual theft.

Cryptocurrency Vs Digital Rupee 

According to the RBI, “a CBDC is a 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.”

But a CBDC can’t be exactly compared to cryptocurrencies. 

“Unlike cryptocurrencies, a CBDC isn’t a commodity or claims on commodities or digital assets. Cryptocurrencies have no issuer. They are not money (certainly not currency) as the word has come to be understood historically,” as said in the announcement made by RBI. 

The CBDC is the digital avatar of paper currency issued by central banks like RBI and should be exchangeable with cash. The commonly-known digital rupee is a currency that the RBI issues and the digital rupee will have the same function, but it won’t be a decentralised asset like cryptocurrencies. Digital rupee will be a currency issued by central banks responsible for governing and managing the asset. 

The digital rupee will be a legal tender, which means you can use it to buy what you want. For example, digital wallets, NEFT and IMPS are examples of digital rupees. So, when the RBI starts circulating the digital rupee, all citizens of India can use it. 

Countries that are Considering CBDC

With the recent popularity of a cashless or digital financial framework, world governments and central banks are exploring (some of them have also implemented) the possibilities of digital currency. 

The Bahamas, Nigeria, Dominica, Montserrat, Antigua and Barbuda, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines have already launched their digital currency. 

Russia – the Digital Ruble has completed the initial trials–full cycle of transactions as announced by the central bank of Russia. 

China – plans to launch the eCNY or digital Yuan by 2022. 

Do We Need the Digital Rupee?

The most important reason for launching a digital rupee by the RBI is to push India forward in the virtual currency race. And, of course, due to the growing importance of cryptocurrency. 

  • With blockchain technology, the digital rupee will increase efficiency and transparency.
  • Blockchain will also enable real-time tracking and ledger maintenance. 
  • The payment system will be available to wholesale and retail customers 24/7. 
  • Indian buyers can pay without a middle man.
  • Lower transaction cost.
  • Real-time account settlements. 
  • You don’t have to open a bank account to transact with a digital rupee.
  • Fast cross-border transactions.
  • No risk of volatility, as the RBI, will back it.
  • Compared to currency notes, the digital rupee will be mobile forever.

But with a behemoth payment system like UPI around, can CBDCs up the game? 

According to a survey by the RBI, cash remains the preferred mode of payment for receiving money for regular expenses. Cash is used predominantly for small value transactions (amounts up to INR 500).

Does the New 30% Tax on Cryptocurrencies Include Digital Rupee?

All cryptocurrencies like Bitcoin, Ethereum, Litecoin etc., won’t be exempt from taxation. 

Only RBI’s digital rupee will be free from tax regulations. 

Read our guide on How Cryptocurrencies Are Taxed In India.

Bottom Line

By introducing the digital rupee, the RBI expects to address problems associated with existing physical currencies and cross-border transactions. 

Cross-border money transfer and converting the money into foreign currency is tedious and expensive. With the launch of the digital rupee, the instant cross-border money transfer is set to make bank cash management and operations more seamless. 

In India, cash placement and tracking the same is a challenge. CBDC can address anonymity and resolve it in a non-intimidatory way and reduce the demand for cash. The government will save operational, printing, distributing and storing costs–empowering the government’s vision toward a cashless economy.

Frequently Asked Questions (FAQs)

What Is A Central Bank Digital Currency?

A central bank digital currency (CBDC) is a digital currency that is issued and supervised by a nation’s central bank. Hundred plus countries are exploring CBDCs at one point or another according to the International Monetary Fund (IMF). But as of the year 2022, only a few countries have CBDC or have solid plans to issue them.

What is the differentiation between digital currency and cryptocurrency?

What are the types of digital currency?

How can users invest in the central bank digital currency?

What is the major disadvantage of a digital currency that could affect me?

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