The e-rupee is like wine: It’ll take time to mature

CBDCs have a distinct edge in cross-border financial transfers, which remain too costly, even as Western sanctions on Russia after the Ukraine war have brought home the risks of dependence on a Western-dominated system. (iStock)
CBDCs have a distinct edge in cross-border financial transfers, which remain too costly, even as Western sanctions on Russia after the Ukraine war have brought home the risks of dependence on a Western-dominated system. (iStock)

Summary

  • India’s CBDC has seen very little adoption in its ongoing trial phase, but then we already have a digital-money success in UPI. The e-rupee’s edge is subtle and it’s best not to rush it

The slow uptake of the Reserve Bank of India’s (RBI) Central Bank Digital Currency (CBDC) at the retail level is not surprising. Despite the involvement of 13 participating banks, daily transactions in this digital form of fiat money are reportedly only in the range of 10,000-12,000, though 3.5 million merchants and 1 million customers were selected for RBI’s nearly-year-old pilot project across 13 cities. Of course, it is entirely possible, and indeed likely, that lack of awareness is a factor. But for the retail user, there is nothing that a CBDC brings to the table that the Unified Payments Interface (UPI) does not. With its ease of transacting, relative safety, low cost and ability to function even via feature phones, UPI has revolutionized the way that transactions—especially small-ticket ones—are done in India. Inclusion of online aggregators and shopping apps as part of the CBDC eco- system could improve the e-rupee’s appeal, but it is unclear if this will suffice to overcome UPI’s first-mover advantage. Indeed, the scorching pace at which digital transactions have spread throughout the country could well be a reason to slow-peddle the CBDC, at least for domestic use.

The UPI platform uses QR codes and works on public digital infrastructure. As Takis Georgakopoulos, global head of payments at JPMorgan, put it recently, “To me, UPI is not very different from a CBDC." Finer distinctions of whether it uses a distributed or centralized ledger format are not relevant to the public. But for the central bank, the set-up required to operationalize the latter could make a material difference. Plus, if it ain’t broke, why fix it? That said, CBDCs do have a distinct edge in cross-border financial transfers, which remain too costly, even as Western sanctions on Russia (particularly its ouster from Swift) after the Ukraine war have brought home the risks of dependence on a Western-dominated system. However, while settlement through CBDCs could be faster and cheaper, global interoperability is a prerequisite that could take time. Here again, the use-case for CBDCs has not made itself obvious, as evident from the interest shown by other countries in using UPI internationally. Earlier this year, Singapore’s monetary authority signed an agreement with RBI to link its PayNow with our UPI; this will enable customers of participant financial institutions to send and receive funds between bank accounts or e-wallets across the two countries in real-time. In China, the only country whose central bank seems to be pushing ahead aggressively with a CBDC, the rationale is that its digital payments use private infrastructure. In our case, the UPI platform was a project sponsored by RBI and is owned by a broad consortium of banks. Notably, the US, where people’s trust in authority is low and the premium placed on privacy is high, is in no rush to launch an e-dollar. Remember, unlike cash, a CBDC could let transactions be tracked centrally.

On paper, the domestic use case for an e- rupee over UPI rests on it being a fully safe RBI promise-to-pay (or IOU), like cash, while UPI transfers demand the solvency of involved banks. Over time, a CBDC could conceivably evolve to let RBI play chief deposit holder (with bank-runs a thing of the past), leaving lenders to borrow from it and focus squarely on risk-priced lending. For now, it’s best to have UPI in the domestic arena and an e-rupee for foreign payments. Let’s treat the CBDC like wine. Let it age and mature before its wider adoption.

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