Some lessons from the world for India’s e ₹-R
4 min read 21 Mar 2023, 11:36 PM ISTOn 1 December 2022, the Reserve Bank of India (RBI) launched a retail central bank digital currency (CBDC), or e ₹-R, in a pilot scheme consisting of a closed user group of selected banks, merchants and customers
PremiumOn 1 December 2022, the Reserve Bank of India (RBI) launched a retail central bank digital currency (CBDC), or e ₹-R, in a pilot scheme consisting of a closed user group of selected banks, merchants and customers. With this, India joined countries exploring CBDCs for retail use. CBDC is legal tender identical to physical currency but is issued and transacted digitally. There are good reasons to issue a retail CBDC, but there are potential pitfalls, too, some being faced by early adopters. As RBI expands the scope of its pilot e ₹-R, it might be useful to learn from these experiences.
Offline Use
CBDC transactionstake place via an app on the user’s mobile, so smartphone access and internet connectivity are its minimum requirements. But this excludes significant chunks of users in emerging economies. For example, in Nigeria, which has low internet penetration, adoption of the e-naira (launched 2021) was low until the wallets were made available offline. Offline availability also increases the “resilience" of CBDCs. The Bahamas, which launched its CBDC—the Sand Dollar—in 2020, subsequently introduced card-based offline access to quickly transfer funds to hurricane-affected residents. Smartphone penetration in India is less than 50%, and few users have continuous internet connectivity. Also, there are about 400 million feature phone users, most of whom are relatively poor, old and less tech-savvy. The RBI is expected to bring in offline functionality to the e ₹-R, just as UPI was extended to feature phones via UPI123. Until then, its take-up is likely to be limited.
Eye on Inclusion
Aa a safe, low-cost, digital form of cash, CBDCs automatically facilitate financial inclusion. But some central banks are going the extra mile to facilitate inclusion. The Bank of Ghana tested the e-cedi in a remote area allowing residents to transact with contactless CBDC-loaded smart cards without a bank account, mobile or internet. In 2021, the Postal Savings Bank of China tested a biometric payment card in Beijing, which allowed the elderly to make purchases and access healthcare without a smartphone. In 2022, CBDC users in some Caribbean nations were able to send notes with each transaction, facilitating record-keeping. India’s push for the Jan Dhan-Aadhaar-Mobile (JAM) trinity is a sound foundation for financial inclusion. While the number of people with bank accounts has risen in recent years, many of those accounts are inactive. Until formal banking habits are established, more people must be nudged towards digital payments using innovative CBDC-based options.
Promote Adoption
Governments have dangled various carrots to encourage CBDC use. These include cash on adoption (Jamaica), reduction in the merchant discount rate (the Bahamas), discounted rickshaw rides (Nigeria) and discounts on public transport (China). Yet adoption has been very slow. For example, in Nigeria, less than 0.5% of the population uses the e-naira. In China, the e-CNY app is downloaded to enjoy promotional offers, but rarely used once the freebies stop. India is one of the world’s fastest growing real-time payment markets. This has both good and bad implications. The advantage is that e ₹-R volumes are more likely to grow with rapid growth in the overall payments pie. But more effort is needed to introduce e ₹-R into the UPI-dominated market. A public education campaign could help to establish the brand.
Policy Revolution?
CBDCS are “programmable", as the underlying blockchain technology allows the creation of specific-purpose CBDCs with an expiry date. For example, in 2021, China distributed e-CNY for use at designated shops within a defined period. Singapore tried out a similar initiative last year. Such programmed money is like a voucher, motivating holders to spend it quickly rather than save it. Due to this, CBDCs can increase the transaction velocity of money, or the number of times each rupee is used for economic activity. This can be a useful policy tool during uncertain periods, as governments or central banks can inject liquidity via specific-purpose CBDCs to boost consumption and enable quick recovery from a crisis. Users can programme their CBDC wallets such that payments are automatically released once certain preconditions are met. In India, such a feature, if extended for business-to-business payments, especially for small businesses, could revolutionize receivables management.
Customize, Customize
Two kinds of countries are trying out retail CBDCs: while developing economies such as India are aiming to reduce use of physical cash, there are countries such as China and Sweden that have largely switched from cash to digital payments and want to restore the role of fiat money in the digital space. India, too, will have to design the e ₹-R to suit its financial markets and country-specific needs. For a start, interoperability with other system components is necessary: note how first mover Paytm eventually had to incorporate the hugely popular UPI into its system. CBDC is not just a payment option that bypasses the bank or PSP intermediary, but it can greatly expand consumer choice by offering a central bank-backed currency. That said, no country expects CBDCs to take over payment markets. Its success will depend on whether it can beat other market players by adapting to evolving demand dynamics.
The author is an independent writer in economics and finance.
