Just outside the Reserve Bank of India’s Monetary Museum – which charts the evolution of money, from barter to electronic transactions – Bachche Lal Sahani is testing the nation’s newest form of currency, the e-rupee.
The 45-year-old fruit vendor is among the first retailers in India to use the central bank digital currency (CBDC) the RBI, launched as a pilot on Dec. 1, a month after the trial for wholesale, or interbank transactions, was rolled out. Since then, Sahani has recorded only about 30 purchases with the e-rupee, which is one of several digital payment options he offers besides Google Pay and PayTM. But he is hopeful it will catch on with customers, many of whom still prefer cash.
“This works even without the internet. We do face network issues at times when we use Google Pay and PayTM,” Sahani said as he packed apples and pears, and announced the arrival of sweet grapes to a regular customer who paid cash. “People don’t know about e-rupee yet because it is still in its pilot phase. It will become popular, but it will take time,” Sahani told the Thomson Reuters Foundation.
A CBDC is the digital form of a country’s fiat, or official, currency that can be used for interbank and cross-country settlements, and for retail transactions. More than 100 countries are researching, developing or piloting a CBDC, according to the Atlantic Council think-tank. Nearly a dozen countries have launched a CBDC, including the Bahamas, Jamaica and Nigeria.
A CBDC aims to complement, rather than replace, current forms of money, and “holds a lot of promise by way of ensuring transparency, and low cost of operation,” the RBI said in a concept note in October. “The e-rupee system will bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient,” it said.
The growing popularity of cryptocurrency and financial sanctions following Russia’s invasion of Ukraine have also motivated nations to test CBDCs, said Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center. “The rise of cryptocurrency has countries like India worried about monetary sovereignty and look to offer an alternative, especially to dollar-backed stablecoins,” said Lipsky, referring to virtual coins that are pegged to the dollar. “India’s pilot is hugely significant as it’s one of the world’s largest economies, and it has galvanised other countries to take action,” he said.
Globally, cash use is falling, a trend that accelerated during the pandemic. Yet about 1.7 billion adults still do not have access to a bank account, according to the World Bank. CBDCs, accessed via e-wallets on mobile phones, can improve financial inclusion, as they can spur adoption of digital payments “particularly when market size and profit potential are insufficient to motivate (the) private sector,” the Bank for International Settlements said in a report.
But many CBDCs are designed to operate via existing financial systems, noted Oliver Bullough, a British writer who tracks financial crimes. “They could be designed to include people who are currently unable to access financial services, but that will be expensive – and I haven’t seen much recognition, if any, that central banks are willing to shoulder that burden,” he told the Thomson Reuters Foundation.
A bigger motivation for central banks is cracking down on money laundering and other financial crimes, said Bullough, as cash is largely untraceable, while CBDCs require an ID. “No digital currency is anonymous. Whether you use Apple Pay, or a debit card, you can be tracked,” he said. “The only way to avoid that is to only use cash, which is pretty hard.”
The RBI, in its concept note, said that “the potential for anonymous digital currency to facilitate shadow-economy and illegal transactions, makes it highly unlikely that any CBDC would be designed to fully match the levels of anonymity and privacy” of physical cash. But it is possible “to get a legal provision to ensure anonymity” for the e-rupee, RBI deputy governor T Rabi Sankar told reporters in December. “Anonymity is a basic feature of currency and we will have to ensure that,” he said, without giving further details.
The Bahamas was first to launch a CBDC, the Sand Dollar, in 2020. But authorities have said adoption remains low. In China – where Alipay and WeChat Pay dominate digital payments – the digital yuan, or e-CNY, has been tested in several cities, and was opened up to foreign visitors and athletes at the 2022 Winter Olympic Games in Beijing, even as some experts warned it was a tool for surveillance and control.
In India, digital transactions have surged in recent years, with payments for even small purchases made through the Unified Payments Interface (UPI), an RBI initiative that allows real-time transfer of funds between bank accounts.
Last month, more than 7 billion transactions worth about $150 billion were made via UPI, just below a January record, according to the National Payments Corporation of India, the non-profit that oversees the platform. Authorities say UPI has helped expand access to banking services and welfare programmes. But with greater digitisation come concerns around privacy and security. With the CBDC, the government can also enforce its adoption and use, said Srinivas Kodali at Free Software Movement of India, an advocacy group.
“Privacy is the biggest concern with any digital payment system, and especially with a CBDC. India’s draft data protection law gives the government broad exemptions to access all data,” he said. “Cybersecurity is another worry, since any loophole will leave people vulnerable. The CBDC, like other digital infrastructure in India, has been developed with no transparency, and no citizen participation,” Kodali said.
Even bankers have said they do not yet see a clear advantage of the e-rupee over UPI. That is also the experience of Reshma Dhokle, a cashier at a supermarket in a luxury mall in suburban Mumbai. The store has done few transactions with the e-rupee, she said, as it does not work most of the time. “We have had no users so far, except some bankers who came to test it,” Dhokle said.