By Arun Kumar Shrivastav
The Reserve Bank of India (RBI) launched the central bank digital currency (CBDC), nicknamed e-rupee or digital rupee, for the retail segment on December 1. It released Rs 1.71 crore in e-rupee format to four participating banks to roll out its use. As of now four banks and four cities have been selected for the rollout of e-rupee. Right now, it is a pilot project which will have multiple stages as per RBI’s plan to introduce the CBDC in a graded manner so that it doesn’t disrupt the existing payments and settlement systems.
The idea of the pilot is to educate people about digital currency and the way it can be used. In the next phase of the pilot, more banks and cities will be included. During the pilot phase, the e-rupee will be released within a closed group for payments between person-to-person (P2P) and person-to-merchant (P2M). Users will need to download a wallet offered by the banks on their mobile phones where they can store the e-rupee. To make payments to merchants, a unique QR code at the merchant touch-point will be used. Users can scan the code through their mobile phones and make the payment.
On November 1, RBI launched a similar e-rupee pilot for the wholesale segments – corporate bankers and institutional clients. Under the first phase of the pilot, e-rupee in wholesale will be used for trading government securities in the secondary market. In such transactions, a clearing agency is used for the settlement of payments. The clearing agency offers the traders a guarantee that the transaction between them will be honored in a time-bound manner. E-rupee intends to remove the role of the clearing agency in such trade settlements. E-rupee can do so without a guarantee because it’s nothing but an alternative form of cash, issued by the central bank under the amended RBI Act.
However, the performance of the e-rupee in the wholesale segment in the last month is far from encouraging. A report by Reuters said that bankers involved in this project are not quite excited about it anymore. They find e-rupee increasing their paper and accounting work without bringing any drastic benefit. On the contrary, it offers some drawbacks as well. For example, trade settlements with a clearing house take place in bulk after netting off several trades into one. In the case of an e-rupee, such settlements have to be performed individually for each trade. This increases the workload without any apparent advantage. For traders, using the e-rupee is similar to using net banking. It doesn’t bring any additional benefits to them. According to the bankers, the e-rupee can be more successful in the retail and consumer sectors.
This brings us to the launch of the e-rupee pilot for the retail segment on December 1. The four banks that have been selected for the rollout of e-rupee for the retail sector are State Bank of India, ICICI Bank, IDFC Bank, and Yes Bank, and cities, where e-rupee will be available, are New Delhi, Mumbai, Bengaluru, and Bhubaneswar. In the next 2-3 weeks, HDFC Bank, Bank of Baroda, Kotak Mahindra Bank, and Union Bank of India will be included in the list of banks that can offer e-rupee services. The cities where e-rupee will be available in the next phase include Ahmedabad, Guwahati, Hyderabad, Gangtok, Indore, Kochi, Patna, Shimla, and Lucknow. While the RBI has released Rs 1.71 crore for this purpose, it said it will supply more e-rupee depending on consumer demand and the bank’s liquidity situation. Merchants can be from street vendors to shops. Payments to food delivery apps and similar merchants will be included in the next phase of the pilot. Initially, the RBI is aiming at 50,000 merchants and customers.
According to Cecilia Skingsley, former Swedish central banker and current chief of the International Bank of Settlements’ Innovation Hub, which is working with several governments on their CBDC projects, digital currency is a natural evolution of money. With the growth of online shopping, digital money is fast removing the need for cash. In many countries including Sweden, the use of cash is less than 10%. CBDC is the next stage of evolution in the concept of money, she argued European Central Bank’s annual event — ECB Forum on Central Banking — in Portugal in June 2022. In her talks, she recognized the R&D done by the broader cryptocurrency sector and the disruptions it created in the banking sector, nudging central banks’ to develop and adopt CBDCs.
A key benefit of blockchain-based cryptocurrencies is the solution they provide for transferring money in real-time. Global remittance transfers cost anywhere between 5% and 25% while transfers through blockchain-powered tokens can cost virtually nothing. Some blockchain companies such as Ripple Labs have created a worldwide network of financial institutions to bring instant and cheap remittance services to the people. They also offer quick and cost-effective payment settlements to remittance service operators and financial institutions. The banking industry can’t ignore these developments for long without losing customers to the burgeoning cryptocurrency sector.
Given this, e-rupee for the retail segment is likely going to become a big hit. It can give competition to PayTM, GPay, and similar other entities. It can go on to become a success as big as the UPI. But this is all thanks to the big Indian market and the lead that India has taken in digital transformation. (IPA Service)