Europe’s Digital Euro

Syllabus: GS3/Economy

Context

  • The European Central Bank (ECB) is about to start the trial phase for its Digital currency, its “preparation phase” commenced in 2023.

Digital Euro

  • A digital euro would be a digital form of cash, issued by the central bank and available to everyone in the euro area, available free of charge to everyone.
  • It will be accessible and accepted in all euro area countries.
  • The currency is meant to be the government’s alternative to existing cashless options such as credit cards, apps, cryptocurrencies, and bank transfers. 
  • Digital euro can be used to pay directly from a digital wallet, on a smartphone or computer, without involving a bank or payment gateway. 
  • The digital euro differs from other types of digital payment options because the ECB issues it directly. 

What is Digital Currency?

  • Digital currency refers to any form of money or currency that is stored and transacted electronically. 
  • Unlike physical currencies like coins or paper bills, digital currencies exist purely in digital form and can be used for online transactions. 
  • There are two main types of digital currencies:
    • Cryptocurrency: This is a decentralized form of digital currency that uses cryptographic techniques for security and operates on blockchain technology. Examples include Bitcoin, Ethereum, Ripple (XRP), and Litecoin.
      • It is not controlled by government or a central bank, making them different from traditional money.
    • Central Bank Digital Currency (CBDC): This is a digital form of currency issued and regulated by a central bank.
      • It represent a country’s official currency in digital form. 
  • Digital currencies offer several advantages:
    • faster transactions, 
    • reduced transaction fees, 
    • and the ability to conduct global transactions without intermediaries. 

Digital Currency in India

  • India’s digital rupee, also referred to as eRs or eINR, is a central bank digital currency (CBDC) issued by the Reserve Bank of India (RBI).
  • The RBI initiated the e-rupee pilot, a digital counterpart to physical currency, in 2022. 
  • The RBI is exploring two types of digital currencies:
    • Wholesale CBDC (e₹-W): This is aimed at improving the efficiency of interbank settlements and payments between banks and financial institutions.
    • Retail CBDC (e₹-R): This is aimed at the general public for retail transactions, similar to how people use physical currency today.

Features

  • It represents a tokenized digital version of the Indian rupee, operating on blockchain or distributed ledger technology.
  • It serves as legal tender, accepted by individuals, businesses, and governmental bodies. 
  • It is issued in accordance with the RBI’s financial policies and can be converted into physical cash through commercial banks.
  • Transactions using the digital rupee are processed more quickly and securely compared to traditional banking systems. 

Significance

  • Replacement for cash: While UPI allows to transfer money among individuals or businesses, e₹ can be used for purchases to FDs.
  • Control: e₹ can be controlled by the RBI to be used for specific purposes only – such as subsidies or other expenses, exclusively. This is unlikely to be a direct transfer that may be misused.
  • Lower costs: By bypassing intermediaries like credit cards or debit cards, the E rupee could lead to lower transaction fees.
  • Financial inclusion: E-rupee accounts held directly with the central bank could offer a low-cost or free option for those without access to traditional banks.

Source: TH