Unlike e-money, stablecoins, or private digital assets like Bitcoin, central bank digital currencies (CBDCs) are digital forms of national or “fiat currencies” issued by central banks. In December 2022, the RBI launched a pilot program for the Digital Rupee (e₹), with select banks testing it among consumers. By mid-2024, the pilot had expanded to include several major cities, registering over a million transactions.
Two versions of the Digital Rupee have been introduced; the e₹-R for retail use, targeting everyday transactions like shopping and bill payments, and the e₹-W for wholesale transactions, focusing on larger transfers between banks and financial institutions.
Since the digital rupee (e₹) pilot began over two years ago, its adoption has seen steady growth. By March 31, 2024, the total retail digital currency in circulation had reached Rs 234.04 crore, a significant increase from Rs 5.70 crore the previous year. However, it still represents a small portion (0.006%) of the total banknotes in circulation.
Tech Infrastructure: While UPI is a huge win, the Digital Rupee needs a serious tech upgrade. Handling transactions for 1.4 billion people requires faster, more reliable systems. Scaling it up without things crashing is a major hurdle.
Cybersecurity Issues: Digital currencies are prime targets for hackers, fraud, and identity theft. India has dealt with cyberattacks on banks before, so the Digital Rupee needs top-notch security, like advanced encryption and multi-step validation, to keep everything safe.
Digital Divide and Inclusion: About 65% of India’s population lives in rural areas, where digital literacy and internet access are spotty. Many people still rely on cash, so getting them to switch to the Digital Rupee could be tough.
Operational and Regulatory Hurdles: To get the Digital Rupee rolling, solid rules are needed to balance privacy with regulations like AML and KYC. Integrating it into existing systems without messing up regular banking will also be tricky.
Cost of Switching: Transitioning to digital currency isn’t cheap. Banks and financial institutions must invest in system updates, train staff, and provide better customer support to ensure the Digital Rupee works smoothly.
UPI vs. Digital Rupee: UPI's cost-free and convenient system remains a significant barrier, offering more value to users. Instead of seeing UPI as competition, RBI could position the CBDC as a complement to the already successful UPI ecosystem. Integrating CBDC into UPI's infrastructure would make the transition smoother for users. This approach would offer the benefits of CBDC while building on the familiarity and trust UPI has cultivated.
India’s Digital Rupee is part of a broader global CBDC movement. Here’s how it stacks up:
China (Digital Yuan): Piloted in 2020, China's Digital Yuan has expanded to several cities. By May 2024, transaction volumes hit RMB 6.6 trillion ($910 billion). China is promoting the Digital Yuan for both domestic and international use.
European Union (Digital Euro): The European Central Bank (ECB) began preparations for the Digital Euro in November 2023, aiming for a 2027 launch. It seeks to simplify cross-border payments and offer a digital alternative to cash.
United States (Digital Dollar): The U.S. is still exploring its options. In 2024, the Federal Reserve released a research paper on potential designs for a Digital Dollar, but concrete plans are still in development.
Sweden (e-Krona): The e-Krona project is in the pilot phase, with the Riksbank testing its design. A final decision on implementation is pending, but testing continues into 2024.
RBI is considering collaboration with the United States and the European Union before advancing with a full-scale rollout of the digital rupee in the coming years. India also plans to extend its partnership with the United Arab Emirates (UAE) for the cross-border CBDC pilot by another one to two years. While the push for CBDC aims to reduce the physical circulation of currency within the country, its international acceptance could eventually position the Indian rupee as a hard currency, similar to the US dollar, Japanese yen, British pound, euro, and China’s yuan—all of which are used for global trade settlement.
However, at present there’s no rush to launch CBDC in full force. RBI has acknowledged the need for caution, emphasizing that a system-wide rollout of the CBDC should only occur after a comprehensive understanding is achieved. Several central banks, including those in Sweden, Australia, and Canada, have paused their CBDC pilots, citing the absence of a clear public interest case. Even the International Monetary Fund (IMF) suggests that digital currencies, once launched, may struggle to achieve large-scale adoption. Additionally, CBDCs pose potential risks to the traditional business models of financial institutions, particularly in areas like deposits and loans, which could lead to reluctance from intermediaries to fully support CBDC initiatives.
Written by Rahul Srivastava