India launched two CBDC pilots last year – one wholesale and one retail. But is the country ready to bring them out of pilot to the national level?
Central bank digital currencies (CBDCs) are on the rise, with many countries around the world trialling them in order to reassert the roles of their central banks. But why the push?
Digital currencies are being more favoured amongst the public, with McKinsey reporting that physical cash usage has declined by one-third in Europe between 2014 and 2021. As digital payments have been increasingly powerful, central banks are struggling to maintain their roles in anchoring their economies.
Enter the CBDC. CBDCs have become a way for national banks to bring their fiat currencies to digital exchange, opening up various opportunities for use. As these state-backed currencies are becoming popular experiments to bring new ways for central banks to bring their payment systems globally, it’s no surprise that India is on the CBDC bandwagon, alongside 105 countries representing over 95% of the world’s GDP.
In fact, the Reserve Bank of India (RBI), India’s central bank, noticed that it had to do something about the shift in demand for digital currencies. India CBCD variations include – a wholesale CBDC (CBDC-W), and a retail CBDC (CBDC-R), meant for the private sector, and Indian citizens.
The broad objective of the India CBDC project has been to “modernise the current physical (cash) currency system,” says a senior official working on India’s CBDC projects.
The CBDC-W pilot began November 1st 2022, with nine banks participating. CBDC-W is meant to help financial institutions be more efficient with their interbank payments system.
The CBDC-R pilot began December 1st 2022 in four cities, Mumbai, New Delhi, Bengaluru and Bhubaneswar; with four other banks initially participating in the trial. Now extended to 15 cities across India, more than 50,000 customers and 10,000 merchants – small and big – have onboarded CBDC-R, including Reliance Retail, the country’s leading retail chain.
As India grapples with how to safely and effectively market, test, and launch a CBDC at the national level by the end of 2023, the RBI however has identified challenges that can push the release date later.
Expanding the India CBDC internationally
But what about expanding where India’s CBDCs can be used?
India had begun work for coordinating its CBDC during its G20 presidency regarding international remittances – as the country is the world’s largest recipient of remittances. According to a World Bank report, India received $100 billion in 2022.
The RBI also said that CBDCs can reduce high costs, wait times, limited access, and insufficient transparency in international remittances, making cross-border payments an important agenda of the CBDC project.
But India hasn’t yet teamed up with any other nation in modernising its payments system – it hopes to do so in the near future.
Others like Sweden and Norway, Project mBridge (China, Thailand, Hong Kong and the United Arab Emirates), and Project Dunbar (vAustralia, Malaysia, Singapore and South Africa) have cooperated under the guidance of the Bank for international Settlements (BIS) for international CBDC projects, including exploring international retail and remittance payments.
“Collaboration with stakeholders including with BIS on developing common global standards for facilitating easy cross-border transactions, will be a way forward,” a central bank document said.
India is noted to be one of the world’s premier emerging markets, and has the fifth largest GDP in the world. Bringing an e-Rupee to international use can make India’s economy even stronger, as they push towards their geopolitical motivation of countering the dollarization of the global economy.
In the context of the internationalisation of the Indian rupee, an Indian CBDC will make it easier for the nation to get international acceptance because it is digital,” said an official working on the CBDC efforts. “For emerging markets, it is a good weapon to have so that in future when we are looking for internationalisation this can be one good help.”
Will there be difficulties in implementation?
While India has found domestic partners to pilot the CBDCs, the biggest challenge is to find ways to market it to the nation’s populace.
Just like other places across the globe, people are unsure about CBDCs, all with different questions – including distinguishing between what’s a wholesale or a retail CBDC, what’s the difference between a ‘digital rupee’ or an ‘eRupee’, and even more questions about the blockchain.
This confusion, ambiguity, and unclearness led to a lack of understanding around India’s public policy goals for a CBDC, and those confused aren’t just limited to the general population. Even Nandan Nilekani, co-founder of tech firm Infosys, and the lead architect of India’s biometrics identity program has asked questions for clarification on India’s CBDC policy.
This means that detailed information about India’s CBDC’s efforts aren’t readily available for the general public, despite the efforts being under a blanket objective of ‘modernising the country’s cash system.’
India’s governments are launching “awareness” campaigns to warn the dangers of cryptocurrencies – and distinct clarification between a CBDC and a cryptocurrency would have to be made for easy understanding by the general public in order to encourage use of it. Just last year, India’s news organisations were focused on advertising crypto exchanges, and bullish on running content related to trading. Now, due to revised guidelines on advertising crypto content, it’s quite different.
In the past few weeks, India’s government-run and business news networks have brought on content that explains CBDCs and how they can be a major player in India’s economy.
The sudden shift can possibly be a good thing. With the RBI’s quick launch of both CBDC projects, media and financial experts have a stream of content to talk about and work with for a while, as they build up excitement about implementing CBDCs at a national level.
India CBDCs vs. the UPI
Meanwhile, India already has a cashless system put in place: the Unified Payments Interface (UPI). Users of the UPI service can pay for everyday goods and services with a QR code linked to their bank account, which they can use to transfer money from their bank accounts to a merchant or vendor’s account.
While some may be confused about why CBDCs instead of the UPI, Reserve Bank of India (RBI) Governor Shaktikanta Das highlighted that CBDCs will operate without the need for a bank intermediary, unlike UPI.
“UPI is bank money. [CBDC] is the central bank’s money,” said a person familiar with the RBI’s work on awareness of CBDCs. ”This will have all the features of physical currency without the risks. It’s different from UPI because this is a currency system, not a payments system.”
In distinguishing the difference between CBDCs and the UPI, RBI Deputy Governor T. Rabi Sankar said a CBDC could maintain cash-like anonymity, unlike UPI – where payment information is tied to each bank account, leaving a digital footprint. However, Sankar adds that what exactly it would look like “will depend on how things evolve,” but is optimistic about keeping anonymity as a feature for India’s CBDC.
CBDCs also don’t require any settlement time between the banks involved in any transactions, which makes it a factor to why the central bank is interested in using them as a key motivation to foster financial inclusion. India’s UPI can only be used by citizens that have bank accounts.
Right now, using India’s CBDC requires a bank account – a bank account is involved with a bank and a city involved in the RBI’s CBDC pilot. Through that, you can, through the RBI, create a digital wallet, and transfer your cash for use. The RBI will maintain a ledger, or record of your transactions, therefore removing the settlement mechanism between banks and making transaction processes faster. However, it’s unclear whether only Indian citizens can register to use India’s CBDC.
“The entity authorised by the RBI to open digital wallets for people in rural areas will do the necessary KYC (Know your customer) checks. One need not have a bank account to have a digital wallet. This will happen in the future depending on each pilot,” said the official. This means that a CBDC can bank the unbanked.
As of 2017, the World Bank reported that 80% of adult Indians have bank accounts, a survey conducted by an entity under India’s Finance Ministry saw that most of its respondents, 52%, prefer to keep their savings in cash, at home.
Just like keeping cash at home, putting money in a CBDC will not accrue interest like in a bank account, according to a source familiar with RBI’s CBDC efforts. To the RBI, one of the major advantages of a CBDC can reduce operating costs – reducing the annual recurring expense of physical currency.
Now, India spends approximately $600 million to print cash alone – plus even more to manage it. Not to mention, 14% of India’s $3.18 trillion GDP is cash in circulation. India is exploring whether it can lower this component.
The CBDC will continue to exist with the UPI, with the central bank responsible for costs of the CBDC infrastructure, in addition to taking responsibility for the digital wallet for millions of Indians.
It’s unclear whether there will be any incentives for CBDC adoption amidst the UPI’s popularity. “As of now, it looks like they will complement each other. The CBDC will target the physical cash component. If the comfort increases and people refuse UPI, then so be it. Let the competition be there,” the senior official said.
Bringing the India CBDC to the national level
The RBI’s concept note for CBDCs called for central banks to consider features that can make it competitive enough with other payments systems in the country. Amongst the demand for a CBDC design that can accommodate international coordination immediately, the RBI wants to “overcome key challenges relating to time zone, exchange rate differences, as well as legal and regulatory requirements across jurisdictions.”
At the crux of designing a CBDC for India in the note is security: where “security has to be the prime design concern while designing CBDCs.”
In the note, the RBI stated its ambition to issue a CBDC within the 2022-23 financial year – but things still remain quite cloudy.