Do we need an Indian e-rupee?

Hi friends 👋,

Happy Wednesday and welcome to the 8th edition of Weekly Olio.

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Now, coming back to business. 😀

Today’s, Publisher’s Parmesan covers the recent pilot of the digital rupee, a Central Bank Digital Currency (CBDC), by the Reserve Bank of India (RBI) - India’s central bank.

For context, India already operates UPI (Unified Payment Interface) which is an instant real-time payment system. The interface facilitates inter-bank peer-to-peer and person-to-merchant transactions. It is used on mobile devices to instantly transfer funds between two bank accounts.

Let’s get to it.

The Quote󠀢 💭

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Publisher’s Parmesan 🧀

Do we need an Indian e-rupee?

Last month, the RBI went live with a pilot of the digital rupee. The intent is to reduce dependence on cash, lower transaction costs, and enable an efficient transfer of money digitally, using a QR code.

But this begs the question, “Am I not doing all this using UPI already? Why would I ever want to use this?”

Let’s take this step by step.

What is the digital rupee really all about?

If you put your money in a bank account, and if the bank were to go out of business tomorrow, well, you’d lose your deposit. That money is yours, but there’s nothing guaranteeing that it will always belong to you. It is just a form of obligation.

A rupee currency note is also a form of obligation — from a central bank, but the most secure form of it. E-rupee or digital rupee is the digital equivalent of a currency note in the form of a digital token. It will be issued by the RBI and distributed through Indian banks - just like currency notes.

Some of the similarities with cash include:

• Users can withdraw the digital rupee tokens via their bank account, store them in their mobile wallet and use them to transact at a store or to pay someone.

• Payments using the digital rupee are real-time and not routed through a bank or middleman - it is between the sender and the Government.

• These digital tokens can be exchanged one-on-one at par with fiat currency.

• Like cash, the digital Rupee will not earn any interest and can be converted to other forms of money, like deposits with banks.

Okay, but what is RBI trying to do here?

Based on the usage and the functions performed by the CBDC and considering the different levels of accessibility, RBI has announced two broad types of the digital rupee:

• Digital Rupee Wholesale:

  • Will be used to power inter-bank, money market and capital market transactions undertaken by banks.

  • Will serve the same purpose as cash reserves (held with the central bank) but with added functionalities.

  • Can make central bank money programmable - to support automation and reduce risk.

• Digital Rupee Retail:

  • This is the electronic version of cash for more widespread public consumption.

  • Will provide a safe, central bank instrument with direct access to central bank money for payment and settlement.

  • Will also help build resilience as an alternative payment mechanism in case of any disruptions to the current payment processing infrastructure.

Conceptually, it makes sense. But it seems quite complicated to execute on the ground. Isn’t it? Oh yes…

• While the digital rupee is thought to be independent of banks, you still need to use a mobile wallet built by a traditional bank to withdraw and store the e-Rupee.

• RBI announced that the digital rupee would also be issued in the same denominations as paper currency and coins. We have no idea how this is supposed to work. 😮

• Like cash, e-rupee is supposed to offer privacy and anonymity but since the money is stored in a wallet maintained by a bank, there are concerns about how anonymity will be ensured. In addition to the wallet, RBI will still have data on each transaction and every e-Rupee holder.

• The digital rupee was also positioned as a “legal” version of cryptocurrency. And occasionally, there have been mentions of it being on a blockchain. However, the latest report indicates that it’ll probably be on a private blockchain which isn’t too different from a regular database.

It’s still early days, so we’ll know the answers to most of these in the months to come. 

Now coming back to the pilot.

To test out its readiness, the Reserve Bank of India started a pilot to test both the wholesale and retail versions of the Digital Rupee.

• Wholesale Pilot:

  • Beginning November 1, 2022, a set of nine Indian banks were able to use the digital rupee to settle secondary market transactions in government securities.

  • It is expected that using central bank money will reduce transaction costs by eliminating the need for settlement guarantee infra or settlement collateral.

  • Based on the learnings, this pilot would be then extended to cross-border transactions and other wholesale inter-bank transactions.

• Retail Pilot:

  • A retail pilot was launched starting December 1, 2022, with four banks and a small group of users in four Indian cities.

  • During this pilot, users can do both P2M and P2P transactions using a dedicated QR code at merchant outlets.

  • Slowly the scope of the pilot would be increased to include more banks and more use cases.

While it is still early days, the pilots seem to be picking pace. On the wholesale front, deals averaged $40 Mn a day. On the retail side, RBI created digital currency worth $400K in just 2 days of the pilot.

It is not just RBI that is flirting with the idea of digital currencies. China, France, Canada and Saudi Arabia have also launched pilots. China launched its Digital Yuan with much fanfare more than 2 years ago - but the results have been below expectations. According to a former Director General in the People’s Bank of China, the cumulative circulation of the e-Yuan in 2 years of the pilot was less than $14 Bn, given the existing payment systems were quite sufficient. Whether the digital rupee will have a similar fate - only time will tell.

One thing is clear, though.

If it has to succeed, retail e-rupee doesn’t just have to beat cash. It has to beat UPI, one of the largest digital payment systems in the world. One that is already ubiquitous, easy to use and works reasonably well. 

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Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.