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UPI powers India’s digital transactions. RBI’s eRupee is compelling but must argue retail use

Could the eRupee piggyback as a key piece of the larger 'digital stack'? RBI's concept note gives a direction, but there are concerns that must be addressed.

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The Unified Payments Interface — India’s instant and interoperable retail payment system — clocked yet another record high in October this year at 7.3 billion transactions amounting to Rs 12.11 trillion. With growth rates of nearly 85 per cent by volume and 67.85 per cent by value over the previous year, UPI continues to lead the country’s now-storied leap to digital payments. The question therefore arises: What is the role of a central bank digital currency (CBDC) in India?

The recently released concept note by the Reserve Bank of India (RBI) attempts to answer this question. A retail CBDC, or an eRupee, could provide an additional payment option outside the commercial banking system, and reduce concentration of liquidity and credit risks in payment systems mediated through commercial banks. This could be an important argument. In addition to UPI currently dominating digital payments, there are market concentration risks posed by third-party application providers within the UPI system. As of June this year, Walmart’s PhonePe and Google’s GPay accounted for around 47 per cent and 35 per cent of the market share, respectively. Access to central bank money directly – at the level of consumers, UPI or even third-party application providers – could therefore decongest and reduce such risks.

Adoption key to success of CBDCs

Another key advantage of an eRupee is expected to be direct access to a safe central bank instrument, given the sovereign guarantee it carries. From a user’s point of view however, while a sovereign guarantee could be attractive, the anonymity offered by cash could be equally important too, even for legitimate cash transactions. Moreover, with ultimate settlement in central bank money and micro-prudential regulation, private digital payment methods are also relatively safe. Alongside the exponential growth in UPI-driven digital payments and high (though downward trending) cash usage in India therefore, an eRupee may still need to argue its case for retail use. This is important as the widespread adoption of CBDCs is key to their success and to justify the use of public resources for their introduction.

But there are glimpses in the concept note on how the eRupee’s adoption may be powered. The note suggests a layered (with potentially both distributed and centralised ledgers) and modular approach to building a “CBDC tech stack” using APIs (application programming interfaces), digital identities, and signatures, among others. Several of these building blocks, such as Aadhar, e-sign, payment rails including UPI are already available. Further, suggested use cases include use as a cash alternative in e-commerce, in which India is currently piloting another state-driven innovation in the form of ONDC (Open Network for Digital Commerce). In contrast with large, walled, e-commerce platforms, the ONDC proposes an open, interoperable, and inclusive set of networks as a digital public infrastructure. The eRupee could therefore ride the wave of online digital payments as a key piece of the larger “digital stack” or ecosystem developing in the country.

The policy tools employed to spur eRupee adoption will also be important considerations. Equally important is whether they will be coercive.  For instance, while the fees chargeable from customers or merchants for UPI transactions have been banned, the justification for, and the proof of stimulus provided by such measures to UPI’s growth itself, is unclear.


Also read: RBI is going crypto with digital rupee — but not Bitcoin, Ether way


A welcome step, but concerns remain

The RBI’s concept note is the first comprehensive articulation of the central bank’s thinking on CBDCs. The note indicates some key decisions. Both a token-based retail eRupee and an account-based wholesale eRupee (eRupee-w) will be considered. Also, a tiered architecture will be considered for the issuance of eRupee to mitigate disruptions to the financial system. On other aspects, such as domestic interoperability with other payment systems and cyber security considerations, the note articulates principles that will guide further steps.

The note also envisages an iterative approach to launch the eRupee, beginning with pilots of simple models in specific use cases. This month, the RBI launched its first pilot of an eRupee-w in the wholesale segment for settlement of secondary market transactions in government securities. A pilot in the retail segment will also be undertaken soon. It is expected that such pilots will, in turn, progressively inform the process as well as the design of the eRupee systems going forward. As an institutional design, and change, with few precedents, this is a prudent approach.

However, there are important areas that require either greater conceptual clarity or articulation in the near term. For instance, the note appears to use the terms indirect, hybrid and intermediate architecture for issuance of eRupee interchangeably. The indirect, or synthetic, model is a replication of the existing two-tier monetary structure between the central bank and private money. According to some, it is not considered a true CBDC. Further, digital currencies are also stores of information.  Regardless of the level of anonymity provided by the eRupee therefore, digital trails of personal and non-personal information will require adequate protection for data and privacy. The lack of a granular law on these fronts could be an important constraint to widespread adoption.

Cross border implications

One of the more compelling motivations to introduce a CBDC is its cross-border use cases, given the high transaction costs associated with international payments and transactions. Other reasons include potential spillovers such as ‘digital dollarisation’ from stronger or more attractive foreign CBDCs (say, with greater ease of use or with remuneration), especially without the concomitant articulation of the rules of engagement.

International sanctions underpinned by a dollar-dominated financial system may also provide impetus as many countries look to find alternative financial pathways. Several countries have also launched cross-border CBDC projects. Pertinently, the latest pilot of the mBridge Project on cross-border CBDCs cleared a new milestone by facilitating over 160 real-world payment and forex transactions between four jurisdictions amounting to more than US$ 22 million in value. The project is a collaboration between the Bank for International Settlements, the Hong Kong Monetary Authority, and the central banks of Thailand, China and the U.A.E. All this increases the potential for fragmentation and underlines the need for interoperability between different financial systems.

With the launch of eRupee pilot, India now joins a small cohort of countries piloting CBDCs. Around 19 G20 countries are exploring CBDCs. The upcoming G20 presidency provides India a valuable and immediate platform to lead international efforts to lay the technical, legal, and governance frameworks for cross border CBDCs.

Priyadarshini D. is an associate fellow with Carnegie India’s Technology and Society Program. Views are personal.

The article is part of a series examining the geopolitics of technology, which is the theme of Carnegie India’s seventh Global Technology Summit (29 November to 1 December), co-hosted with the Ministry of External Affairs. Click here to register. ThePrint is the digital partner. Read all articles here.

(Edited by Humra Laeeq)

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