CBDC: RBI pushes for wider adoption of e-Rupee with offline features

CBDC, e-Rupee
The RBI is considering anonymity and offline functionality to boost e-rupee use as daily transactions hit one million.

CBDC adoption: The RBI is actively promoting its central bank digital currency, and is considering a pilot programme for the wholesale segment including commercial papers and certificates of deposits. Despite the growing momentum and daily retail transaction volumes reaching one million, retail users still strongly favour UPI over the e-rupee.

For the government to assess the broader economic impact of the e-rupee on monetary policy and the banking sector, transaction volumes must increase significantly. RBI Governor Shaktikanta Das has proposed eliminating transaction histories to grant the e-rupee a level of anonymity akin to cash, which could boost its acceptance. Additionally, introducing offline capabilities and programmability are under consideration.

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What is the e-rupee

On November 1, 2022, the Reserve Bank initiated a wholesale pilot of the CBDC for government bond settlements. This was followed by a retail pilot.

Launched amid a digital asset and cryptocurrency boom, the e-rupee is the official digital legal tender designed specifically for retail transactions. Unlike private cryptocurrencies, the CBDC-R is pegged to the national currency’s value and provides a secure, government-backed option for electronic payments. The RBI wants to improve the efficiency of the e-rupee and security of retail payments.

Digital currencies seek to reduce physical cash management costs and enhance inter-bank market efficiency. They are also seen as a way to make cross-border payments cheaper, faster, and more secure, benefiting India, a major recipient of remittances.

Security and privacy concerns

A crucial aspect not fully addressed is the security and privacy concerns surrounding CBDCs. The introduction of digital currencies inherently raises issues related to data protection, cyber security, and user privacy. It is imperative to develop robust security frameworks to safeguard against cyber threats and ensure that privacy norms conform to global standards. This aspect is particularly important as digital currencies become a mainstream financial tool, necessitating the highest levels of trust from the public.

The RBI has conducted successful wholesale and retail digital currency pilots, gaining valuable insights into design, technology, and user behaviour. The wholesale pilot involved settling secondary market transactions in government securities, while the retail pilot targeted a select group in specific locations.

Through these pilots, the RBI decided to position the central bank digital currency alongside UPI, aiming to analyse shifts in consumer banking behaviours rather than merely increase CBDC acceptance. Governor Das discussed these insights at the BIS Innovation Summit 2024 in Basel, Switzerland, noting that digital tokens make CBDCs more relatable as a cash equivalent.

Globally, many central banks are exploring digital currencies. According to the Atlantic Council, 19 G20 countries are developing CBDCs, with over twenty-one countries conducting pilots and 11 having launched digital currencies. Meanwhile, the RBI is gradually expanding its digital currency pilots to more banks, cities, people, and applications, having achieved a significant milestone of 10 lakh transactions per day by the end of 2023.

Global CBDC best practices 

Additionally, it would be beneficial to compare India’s approach to CBDCs with global practices. Many countries have unique strategies based on their specific economic conditions and monetary goals. For instance, China’s digital yuan pilot has focused heavily on consumer acceptance and integration with existing payment platforms, while the Bahamas’ Sand Dollar emphasises improving financial inclusion. These comparisons could provide valuable lessons for India, particularly in enhancing central bank digital currency acceptance and functionality.

The government looks to enhance digital currency adoption through offline functionality and programmability, which Governor Das highlighted as critical features. Programmability allows specific restrictions on how digital currency funds are used, such as directing social welfare benefits appropriately and reducing fraud risks.

These features align with broader citizen welfare goals. If effectively implemented, they can improve governmental spending efficiency and enhance public welfare. Although programmability temporarily restricts fund fungibility, it ensures funds achieve specific objectives without permanently affecting their exchangeability.

India’s investment in digital payment infrastructure provides a strong foundation for CBDC success. However, widespread implementation will require time. As digital and financial exclusion often coincide, central bank digital currency usage necessitates basic digital literacy and mobile phone access. The ongoing pilot enables the RBI to refine its approach in preparation for a broader rollout, setting a precedent for other major central banks exploring CBDCs.