RBI’s digital rupee must leap over many hurdles for wider adoption

RBI is also aiming to onboard more non-bank payment service operators and make the e-rupee inter-operable with India’s Unified Payments Interface (UPI). Earlier this year, RBI met with bankers and fintech officials to work out how to increase consumer adoption and integrate the digital currency with the mainstream financial system. Yet, overall adoption of the e-rupee remains tepid.

As of the week ended 31 May 2024, by RBI data, the e-rupee had e ₹323.5 crore in circulation, up from e ₹100 crore in December 2023, but still a tiny fraction of the ₹35.4 trillion of banknotes in circulation. Take other indicators. As of April, within 16 months of its December 2022 launch, 4.6 million consumers and 400,000 merchants had been signed up to use the e-rupee. 

But transactions remain a very tiny fraction of UPI transfers. Launched in 2016, UPI differs. Notably, RBI Deputy Governor T. Rabi Sankar in April mentioned a downtrend in daily e-rupee transactions. It allows real-time inter-bank peer-to-peer/merchant transfers via mobile phones. 

In contrast, the e-rupee is a digital alternative to cash which can be exchanged via wallets or the UPI infrastructure. However, notably, from an end-user perspective, the e-rupee offers no obvious added value.

Also read: Indian banks offer incentives to lift RBI’s e-rupee: Report

With users showing a UPI preference, CBDC volumes have struggled to pick up. Weak adoption is not unique to India. Retail CBDCs were launched elsewhere too, in the hope of revolutionizing payment systems, but their adoption has been tardy. While country-specific factors contribute to it, several obstacles are common.

First, extant online payment systems in countries like China and India weaken CBDC demand, hampering adoption. Second, the absence of robust digital infrastructure hampers seamless CBCD transactions, while regulatory ambiguity further complicates adoption, necessitating clarity and stability to instil confidence among users and businesses. Third, trust within the system is deficient.

Specific examples from other countries with retail CBDCs may offer some lessons.

Stalled pilot: The DCash pilot, launched by the Eastern Caribbean Central Bank in 2019, was shuttered in January because of low adoption, with circulation at just 0.16% of total currency. Trust issues were exacerbated by a technical outage in January 2022 that shut down the system for over a month.

Digital infrastructure challenges: The Bahamas’ Sand Dollar, Nigeria’s eNaira and Jamaica’s Jam-Dex have some common problems. The Bahamas’ Sand Dollar, the first CBDC, was launched in 2020. Despite efforts to promote it through extensive educational campaigns and integration with government payment systems, circulation had reached only $1.1 million by September 2023, representing 0.19% of the total currency in circulation. 

Also read: Digital Rupee: How central bank digital currency (CBDC) will boost financial inclusion

Nigeria’s eNaira, launched in October 2021 to improve financial inclusion in the country and reduce transaction costs, has struggled with adoption. Only about 0.5% of Nigerians are found to use it. Jamaica’s Jam-Dex, launched in 2022 to decrease cash dependency and serve the financially under-served, saw an initial surge thanks to user incentives, but stalled at $1.64 million (0.11% of its total currency in circulation).

Despite having clearly defined use-cases for their country-specific CBDCs, these pilot projects suffered from weak internet connectivity and poor digital infrastructure, integration problems with traditional banking systems, low public awareness and inadequate incentives for adoption.

Weak CBDC value propositions in China and India: China’s e-CNY, despite some advanced features, has seen limited adoption, attributable to the dominance of Alipay and WeChat Pay, which allow online transfers. Similarly, India’s e-rupee faces challenges in the context of the popular UPI system. 

Efforts to make e-rupee wallets inter-operable with UPI and explore government-to-person (G2P) transactions and cross-border payments have not yet provided a distinct value proposition for RBI’s digital currency. There is a case to be made that the e-rupee is safer than UPI as it is a direct liability on RBI (i.e., like cash, it is not dependent on any commercial bank), but this argument holds an appeal that is far too subtle for most users.

To popularize the e-rupee, RBI is working with lenders to introduce programmability, which allows directions to be set for its use. For example, IndusInd Bank used a programmable e-rupee to pay farmers for carbon credits. 

Also read: E-rupee: Maximize its appeal

The Bahamas and Nigeria are also using CBDCs for government disbursements and welfare programme transfers. Jamaica is exploring the use of its CBDC to make seasonal work payments more efficient, while in China, civil servants in Jiangsu province have been receiving wages in e-CNY since May 2023.

While RBI aims to make the e-rupee as cash-like as possible, programmability could challenge its fungibility and liquidity, which may affect privacy and public trust. Experts warn that programmable money might alter economic behaviour and worsen inequality. Further studies need to be done. In all, RBI must proceed on its e-rupee with care.