GS Paper II & III
News Excerpt:
The Reserve Bank of India (RBI) has been striving to boost the adoption of its Retail-Central Bank Digital Currency (R-CBDC) or e-rupee. This article also talks about giving a comparative view of other available options and examples from other countries.
What is e-rupee
- E-rupee is a digital form of the Indian rupee, introduced by the RBI.
- It was launched to promote digital payments and reduce dependence on physical currency.
- RBI launched the first pilot of Digital Rupee- Retail segment (e₹-R) on December 01, 2022.
- Unlike UPI, the e-rupee is a digital alternative to cash, exchangeable via wallets or the UPI infrastructure.
Initiative taken by RBI
- RBI aims to expand the digital rupee's reach by including more non-bank payment service providers and making the e-rupee compatible with India's Unified Payments Interface (UPI).
- Earlier this year, RBI engaged with bankers and fintech officials to strategize on boosting consumer adoption and integrating the digital currency into the mainstream financial system.
- Despite these efforts, overall adoption of the e-rupee remains limited.
Circulation of e-rupee
- As of the week ending 31 May 2024, RBI data shows the e-rupee in circulation stood at ₹323.5 crore, up from ₹100 crore in December 2023.
- However, this is still a minuscule portion of the ₹35.4 trillion in banknotes currently in circulation.
- By April, within 16 months of its December 2022 launch, 4.6 million consumers and 400,000 merchants had signed up for the e-rupee.
- However, transaction volumes remain a small fraction of those on UPI, which was launched in 2016 and supports real-time inter-bank peer-to-peer and merchant transfers via mobile phones.
- RBI Deputy Governor noted a decline in daily e-rupee transactions in April.
Reason for low adoption
Several common obstacles hinder their adoption.
- Firstly, existing online payment systems in India reduce the demand for CBDCs.
- Secondly, a lack of robust digital infrastructure complicates seamless CBDC transactions, and regulatory ambiguity further deters adoption.
- Thirdly, trust in the system is generally lacking.
It offers no significant additional value to end-users compared to UPI, leading to low adoption rates.
Trend in other countries
This trend is not unique to India; other countries have also seen slow uptake of retail Central Bank Digital Currencies (CBDCs).
- The DCash pilot by the Eastern Caribbean Central Bank, launched in 2019, was discontinued in January due to low adoption, exacerbated by a technical outage in January 2022 that halted the system for over a month.
- The Bahamas’ Sand Dollar, Nigeria’s eNaira, and Jamaica’s Jam-Dex also face similar issues. Despite extensive promotional efforts, the Sand Dollar had only $1.1 million in circulation by September 2023, representing 0.19% of total currency.
- Nigeria’s eNaira, launched in October 2021, has seen usage by only about 0.5% of Nigerians.
- Jamaica’s Jam-Dex, introduced in 2022, initially surged due to user incentives but stalled at $1.64 million (0.11% of total currency).
These pilot projects struggled due to weak internet connectivity, poor digital infrastructure, integration issues with traditional banking systems, low public awareness, and inadequate incentives for adoption. China’s e-CNY has seen limited adoption due to the dominance of Alipay and WeChat Pay.
Challenges in India
- India’s e-rupee faces challenges against the popular UPI system.
- Efforts to integrate e-rupee wallets with UPI and explore government-to-person (G2P) transactions and cross-border payments have not yet created a compelling value proposition for the digital currency.
Way Forward:
- While the e-rupee is considered safer than UPI as it is a direct liability of RBI, this subtle benefit is not easily understood by most users.
- To increase e-rupee popularity, RBI is collaborating with lenders to introduce programmability, which allows for specific usage instructions. For instance, IndusInd Bank used a programmable e-rupee to pay farmers for carbon credits.
- Similarly, the Bahamas and Nigeria are utilizing CBDCs for government disbursements and welfare transfers.
- Jamaica is considering using its CBDC for seasonal work payments, and 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, potentially affecting privacy and public trust.
- Experts caution that programmable money might alter economic behavior and exacerbate inequality.
- Overall, RBI must approach the e-rupee's implementation with caution and further study in this direction is very necessary.
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Programmable Money (PM)
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