From usage of coins to paper currency and now to digital currency, the idea of money has undergone many changes. India has come a long way in a very short period of time in terms of innovation in digital payments. Modern, cutting-edge payment systems that are accessible, affordable, effective, secure, and always available are a source of national pride. The development of reliable, always-available electronic payment systems is to blame for this startling shift in payment preferences. For facilitating transaction in lesser time, RTGS and NEFT were first introduced in 2004–2005, and then followed by IMPS and UPI were introduced in 2011 and 2016 for instant payment settlement, respectively.

The developments received international acclaim and changed the nation's payments environment time to time. Since these payment methods offered customers an alternative to using cash and paper to make payments, their convenience ensured their quick adoption.

The groundwork for the nation's next phase of the digital payment revolution has been set with the introduction of the "Digital Rupee," or CBDC. Beginning of November 1, 2022, the central bank had tested the wholesale use of India's very own digital currency, the e-Rupee. According to an announcement, the use case for this pilot is the settlement of secondary market transactions in government securities. From December 1, the RBI will start its first pilot test of a retail e-Rupee. In four cities, including Mumbai, New Delhi, Bengaluru, and Bhubaneswar, the pilot will begin in four banks, including State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank. This pilot programme will eventually include participation from four other banks: Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank. It will also be expanded to additional cities, including Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla. The pilot programme, according to the RBI, "will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real-time,"

Central Bank Digital Currency (CBDC) is a blockchain-backed digital version of government-backed "Fiat Currency" that may be used for transactions and is overseen by the central bank. It is "legal tender" that has been digitally created and issued by a central bank. Central Bank Digital Currencies may make it possible to reach unbanked people and offer a greater range of financial services. The introduction of CBDCs would represent nothing less than a revolution in global monetary policy, complete with advantages and disadvantages of course.

CBDC have all of the characteristics of physical cash because they are an electronic version of sovereign currency. The primary motivations for investigating the issuance of CBDC in India include, lowering operational costs, fostering financial inclusion, efficiency, and innovation to the payments system and providing the public with uses that any private virtual currency can provide, without the associated risks. The usage of CBDC's offline capability would also be advantageous in distant regions when and where no electrical power or mobile network is available.

It is estimated that more than 100 nations are testing, researching and experimenting with CBDCs. In China, for example, e-CNY is utilised in more than 20 cities and continues to grow, with more than a hundred million individual users and billions of yuan in transactions.

Features of Digital Rupee

• Central banks issue sovereign money in accordance with their monetary policies.
• All residents and businesses accept it as a means of payment and a secure store of value.
• Cash & commercial bank money are freely convertible.
• Holders of fungible legal money do not need to have a bank account.
• It is expected to reduce the cost of issuing money and facilitating transactions.

How would a layman be able to transact with E-Rupee?

The CBDC platform is hosted by the National Payments Corporation of India (NPCI). Customers will be able to use E-Rupee to make purchases using a digital wallet offered by partner banks. QR codes can be used for transactions between individuals or between individuals and merchants. The digital payment model, UPI,  that indian extensively use presently use includes numerous middlemen. Many of these stakeholders will be removed from the chain, which will allow banks to save money.

Types of CBDC

CBDC can be account-based or token-based.

An account-based system necessitates the verification of the payer's identification. An account-based system would necessitate the keeping of a record of all CBDC holders' balances and transactions, as well as indicating who owns the balances. An intermediary confirms an account holder's identification in account-based CBDC.

A token-based, on the other hand, necessitates validating the object used to pay. A token-based CBDC is a bearer instrument, similar to banknotes, which means that whomever owns the tokens at any particular moment is believed to own them. To illustrate, if a customer pays for a commodity or service using fiat currency, the only thing the merchant needs to worry about is that the bill delivered to him/her is authentic. If the money is legitimate, the service provider will keep it and the transaction will be completed.

Advantages of CBDC

Banking the unbanked: CDBCs may provide a chance to overcome some of the difficulties that the unbanked face. Most of the time, the fundamental expense of setting up and reaching out to a person does not appear to be practical. CBDCs might avoid many entrenched economic interests and reduce much of the bureaucracy.

Supporting the Underprivileged- During the reign of Covid, the world came to a halt. Central banks might coordinate cash injections via CBDC aimed at the underprivileged sector of society in exchange for financial assistance.

Digital Currency Proxy War: In the current situation, when inflation in Western industrialised countries is strong and central banks are raising interest rates. Similarly, India risks becoming engulfed in the maelstrom of a proxy digital currency war as the US and China vie for primacy. A sovereign Digital Rupee is required to counter the proxy war that threatens our national and financial security.

Reduce Currency Costs: According to research, the Indian government spends Rs 4.18 on each Rs 2,000 note. Each Rs 500 note costs Rs 2.57 to produce, whereas each Rs 100 note costs Rs 1.51. CBDC's widespread adoption can lower the cost of currency management while enabling real-time payments without the need for inter-bank settlement.

Reduce reliance on cash: India is a cash-driven economy, and according to a 2019 RIB study, 50% of transactions in India were conducted in cash. The economy may minimise its reliance on cash by enabling quick and convenient offline transactions through CBDC.

Ease of use in cross-border transactions: CBDC will allow the participant to perform both domestic and foreign transactions without the involvement of a third party or a bank.

Protect the ordinary man's faith in the national currency in the face of the expansion of crypto assets.

The Drawbacks of CBDC

Inflation
Policymakers throughout the world are torn between controlling inflation and supporting growth. CBDCs are the next frontier for central bank stimulus, causing a more stronger, targeted money drop.

The government and central banks will have total power.