There Is A Wide Gulf Between Ambition And Delivery For Digital Rupee

India's central bank digital currency—the e-Rupee—is in the middle of an adoption push. But there seems to be a gap in how the project is being envisioned and how it's being implemented.

The technology and policy choices behind the e-Rupee aren't fully settled, according to three people familiar with the pilot. All of them spoke on the condition of anonymity. 

Despite the lack of clarity surrounding these elements, the Reserve Bank of India has ambitious targets in mind for the digital currency.

"We should aim to increase retail CBDC transactions to 1 million per day by the end of this year," RBI Deputy Governor T Rabi Sankar said at a banking sector event on July 11. Currently, only about 5,000–10,000 transactions occur via the retail CBDC on a daily basis, Sankar said.  

For the wholesale e-Rupee as well, transaction volumes are thin since it only serves a niche use case so far. Some of the measured progress is by design to help the RBI and banks establish internal processes, the first person familiar with the pilot said.

First launched in December 2022, the retail central bank digital currency's pilot was slow to gather steam. But a recent adoption push from banks—powered by phone calls, emails and WhatsApp messages to prospective users—has pushed the number of customers to 1.3 million as of June-end.

Four months earlier in February, the number of users stood at about 50,000 and merchants at around 5,000, Sankar said at the post-monetary policy committee meeting press conference on February 8.

"We want the process to happen gradually and slowly. We are in no hurry to make something happen very quickly," Sankar said at the time.

At the July 11 event, the RBI also stated that it wants a wider cohort of banks to participate in the pilot. But technological limitations could make smaller entrants dependent on bigger banks. 

The decision to make Unified Payments Interface QR codes inter-operable with the CBDC will also expand acceptability but as with the larger technology and policy choices surrounding the e-Rupee, it's also yet to be ironed out.

The RBI and the National Payments Corporation of India did not respond to a request for comment on this story.

By the end of July, e-Rupee users will be able to scan UPI QR codes to pay with the e-Rupee, Sankar said in his speech.

Making the two interoperable would allow e-Rupee users to transact at any store that accepts UPI. But that's so far so good on paper. On the implementation side, things are still a work in progress.

On Thursday, HDFC Bank Ltd. announced that it has integrated UPI QR codes with the e-Rupee. But things are not so simple yet.

Two people familiar with the pilot, however, said that interoperability is still in the works at the NPCI and was not finalised. That process is likely to take another month or so to be completed, the second person familiar with the pilot said.

The interoperability currently works if both the merchant and the customer are part of the e-rupee pilot, but if the merchant isn't, the transaction would fail.

The eventual plan is to make it such that the money flows automatically to a bank account via UPI in case the merchant doesn't have an e-Rupee wallet.

The e-Rupee currently operates on systems built by the NPCI, but the RBI is not wedded to that technology, two of the three people quoted above said.

"Not sure if we have completely solved the issue of which technology to use for the e-Rupee," Sankar had said last week. The RBI may consider other private technology providers in the future but will do so without disrupting the pilot, the private banker said.

Blockchain companies, such as R3, Hyperledger and others, had conducted proof-of-concept tests for the RBI as well, but the regulator has chosen to go with the NPCI's system for now, the second person said.

A total of 11 banks, including HDFC Bank, ICICI Bank Ltd. and State Bank of India, currently offer digital rupee wallets to users.

The RBI is urging smaller banks to be a part of the pilot as well and has proposed that large banks already involved in the pilot serve as transaction clearing nodes on their behalf, the people quoted above said.

This is due to a limit on the total number of nodes that can be made operational, which may cause further complications.

Put simply, nodes store a digital copy of all transactions and are continuously updated. They facilitate a common ledger maintained by different parties and, hence, counter repeated spending of the same money. Hence if you have more banks than nodes, it becomes a challenge to record transactions

To resolve this, the RBI is proposing that larger banks maintain and update ledgers for smaller lenders, the people quoted above said.

For the retail and wholesale CBDC—at their current stage—the adoption hurdles lie in two things: lack of reason to switch from existing solutions and limited use cases.

With the UPI serving as the popular and free option for retail payments, the reason to switch to the retail e-Rupee is limited.

On the wholesale side, with the e-Rupee limited to a small part of the government securities market with few participants, volumes are unlikely to rise unless use cases increase.

After starting with an average daily transaction volume of about Rs 200 crore in November, wholesale CBDC transaction volumes have since declined to about between Rs 15–20 crore per day, according to last available data with Clearing Corporation of India Ltd. On July 13, for instance, a total of two trades were carried out using the wholesale e-Rupee for a total consideration of Rs 20 crore.

If the RBI mandates that all call money transactions need to be settled in the CBDC, you will see volumes rise, one of the three people quoted earlier said.

Countries like Nigeria have tried to offer discounts on auto-rickshaws to encourage CBDC adoption in the past but that has faltered to encourage uptake.

"The average number of eNaira transactions since its inception amounts to about 14,000 per week—only 1.5% of the number of wallets out there. This means that 98.5 percent of wallets, for any given week, have not been used even once," according to a working paper from the International Monetary Fund.

The RBI has no plans to offer incentives to encourage the retail e-Rupee, Sankar had said.

Overall, banks appear to be much more charged and confident about deploying the e-Rupee than they were a few months ago. The push comes in the backdrop of ongoing deliberations on what the CBDC's technology and policy design will eventually shape up to be.