By Aarush Venkatesh

Abstract

The Reserve Bank of India (RBI) is at a crossroads in India’s financial growth, pondering the incorporation of a Central Bank Digital Currency (CBDC) into its monetary inventory. The article examines the positioning and likely adoption of CBDC notably in the context of the extremely successful Unified Payments Interface (UPI). As UPI redefines electronic payments, the emerging question is, if the CBDC represents a significant leap forward or risks being reduced to a non-starter by the flexibility, familiarity and continued evolution of existing systems, particularly NPCI’s child UPI. The article navigates the complexities of current payment infrastructure, innovation, competition, and shifting tastes.

Introduction

The Reserve Bank of India (RBI) is at the forefront of financial innovation and enhancement of the nature of financial transactions in India, with the aim to reshape India’s monetary environment by offering more control over the money supply along with increased financial inclusion. The introduction of plans to integrate a Central Bank Digital Currency (CBDC) was the latest development in the Reserve Bank of India’s inventory of systems that serve this purpose. However, in the run-up to this goal, the unrivalled success of the Unified Payments Interface (UPI) raises significant questions regarding the necessity and profitability of a CBDC. As UPI continues to revolutionise digital transactions the RBI’s digital currency experiments come under scrutiny. This article goes into the need for CBDC in the light of the runaway success of UPI which has taken the digital payments space by storm by enabling immediate payments of relatively small values through bank as well as non-bank platforms. UPI has become a standard for digital payments by individuals and is well complementing the existing NEFT and RTGS platforms operated by RBI.

What is CBDC?

CBDC (the Digital Rupee or eINR in the case of India) is defined by the Reserve Bank of India as an electronic legal tender that is issued by the country’s central bank. It is similar to traditionally recognised paper money but in a new form, and it will be exchangeable with existing currency and accepted as a medium of payment. CBDC is a digital or virtual currency, but it is not the same as the private virtual currencies that have proliferated in the recent decade. Private virtual currencies contradict the historical definition of money in that they are not commodities or claims on commodities and have no intrinsic value. Examples of Private Virtual currencies include reward points issued by companies and coupons or any other measure of value that can be redeemed in exchange for benefits from a fixed pool of merchants. CBDC is different in the sense that it acts as a completely open-loop digital form of currency that can be used in the same way a banknote does.

In India, the government’s implementation of CBDC, backed by the Reserve Bank of India (RBI), is said to be a step forward in modernising the financial system. In essence, digital money is a digital version of the national currency that serves as a safe and efficient medium of transaction. The State Bank of India (SBI), being a forerunner in the nation’s banking sector, was the first to embrace CBDC technology. The motive of the Reserve Bank of India to enter and develop a CBDC is to promote financial access, improve the effectiveness of monetary policy instruments, and keep current on global financial developments. Banks throughout India are strongly encouraging clients to try CBDC systems for peer-to-peer transactions. The reasons for this drive range from improving transaction speed and security to familiarising people with the prospective advantages offered by an electronic money ecosystem. By embracing CBDC, the government and banks foresee a future in which financial transactions are frictionless, inclusive, and in sync with the quickly evolving digital finance sector.

Since the budget announcement on the launch of CBDC in the fiscal year 2022-23, successful trial launches in both wholesale and retail segments illustrate India’s rapid progress in CBDC adoption, overtaking large economies. A key objective of Central Bank Digital Currency (CBDC) adoption involves simplifying the cost variables associated with traditional cash handling. CBDC has an impact on the Environmental, Social, and Governance (ESG) costs that are borne by central banks, private banks, enterprises, and consumers. The introduction of CBDC into the monetary environment adds to a decrease in total operating costs and expenses associated with reconciliation and settlement delays. While CBDC may incur early fixed infrastructure expenditures, ongoing operations expenses are expected to be far lower. Consumers who use a Central Bank Digital Currency are said to enter a simplified environment that is geared towards ease and effectiveness.

How does CBDC work for users?

Users begin by creating a digital wallet and then go through a verification procedure before obtaining CBDC through provisions such as direct issuance or exchanges. Consumers use QR codes or contactless technologies to make peer-to-peer transactions with money safely saved in their digital wallets. This has been defined as an idea that is revolutionising day-to-day payments. CBDC goes beyond single transactions, allowing users to make merchant payments and integrate with a variety of financial services like savings accounts and loans.

Experience With Digital Currencies In Other Countries

Various governments have embraced novel approaches to incorporate these virtual currencies into their financial ecosystems for the development of Central Bank Digital Currency (CBDC) adoption. China, an early adopter in this field, has created the Digital Currency Electronic Payment (DCEP) project. Adoption measures for China’s digital Yuan, also referred to as e-CNY, offer seamless integration with commonly used messaging and financial applications, ensuring a user-friendly experience. With its gradual CBDC adoption, the populous nation is rapidly shifting into a cashless society, with digital wallets serving as transaction conduits. It has also developed to integrate the e-CNY system with the existing digital payment ecosystems, which is largely run by Alibaba Group’s Alipay and Tencent Holdings’ WeChat Pay, in order to make it easier for customers and businesses.

Sweden has been working on the use of an e-Krona. The Swedish strategy focuses on increasing financial inclusion while preserving the country’s existing digital payment ecosystem. User-friendly interfaces for digital wallets are among the adoption strategies, guaranteeing access to a broad demography. Sweden sees the e-Krona as a digital supplement to real currency, providing citizens with a diverse and safe way of conducting financial transactions. Initiatives like The Digital Dollar Project are creating the framework for eventual CBDC adoption in the United States, which is in its early phases. Pilots are being conducted to examine the viability of CBDC adoption, with a particular emphasis on user experience, security, and regulatory compliance. These policies indicate a cautious yet proactive strategy that is consistent with the United States’ position as the world’s financial leader.

Will CBDC take off in India?

At this point, a very important question to ask would be how India is working on adopting a CBDC and what features it provides that already existing systems do not provide effectively. The launch of pilot programs by various banks across the nation marks India’s entry into Central Bank Digital Currency (CBDC). However, there is some skepticism about the necessity of such trials, particularly in light of the existence of solid payment systems such as UPI (Unified Payments Interface) and other digital platforms. In an environment where UPI has already established itself as a user-friendly and widely adopted digital transaction system, the justification for CBDC pilots becomes a topic of debate. Critics claim that the extensive infrastructure of UPI, together with other current digital payment systems, renders CBDC experiments unnecessary. India has a variety of digital payment methods, including wallets, prepaid cards, and NEFT/RTGS, each of which serves a distinct purpose. Given the diversity of the ecosystem, focusing efforts on optimising current platforms, improving security, and boosting user education may be more useful. A better strategy probably entails using the potential of existing systems rather than duplicating resources in CBDC experiments. This covers not just UPI, but also leverages the benefits of other digital payment technologies to establish a unified and interoperable framework. By bolstering these current channels, India will not only be able to satisfy its digital payment demands more successfully but will also be able to simplify its digital financial environment for a more smooth and integrated user experience.

The widespread acceptance of payment systems such as CBDC is essential for it to properly integrate into society. Major utility organisations like toll roads, energy, transport and telecom companies would most likely hesitate to adopt yet another new payment mechanism unless it is met with widespread acceptance. Collecting revenue in the form of a CBDC would mean that the vendors that these companies regularly transact with, would also have to accept payments in the form of a virtual currency too, which may not always be the case. In such scenarios, accumulated CBDCs would have to be converted to regular non-digital currency and be credited to bank accounts to enable payment to beneficiaries who do not have a CBDC account.

When considering payment methods like UPI, NEFT and RTGS, these systems were introduced to simplify and streamline transactions using the existing money framework. NEFT and RTGS made commercial transactions much simpler, faster and secure, while UPI made P2P (peer-to-peer) payments more accessible and easier for the masses, especially after the widespread use of smartphones in our country in the last decade.

Conclusion

Despite the possible benefits of a future eINR, its success clearly hinges on its extensive acceptance, user familiarity, and established ecosystem. Interoperability of eINR with existing payment systems will also be a critical requirement.

Because of its current interoperability, wide app integration, proven efficiency and relatively inexpensive transaction costs, the existing mode of UPI has become a digital transaction standard. Moving to an eINR would include overcoming user adaption challenges, developing a similar ecosystem, maintaining interoperability, and matching UPI’s efficiency and cost-effectiveness. While the notion of an eINR is promising, UPI’s current dominance highlights the difficulty that any new digital currency would face in garnering universal adoption in a market where UPI has become synonymous with frictionless and reliable digital payments. India already has payment methods that are known to be world-class in terms of simplicity and accessibility. Other countries such as Bhutan and Nepal already accept UPI as a payment method while efforts are being made to introduce QR-based payments in UAE, Singapore and Malaysia among many others. It would be a far better idea, in my opinion, to focus on refining existing systems instead of jumping on the bandwagon of introducing a digital currency as yet another product with no significant benefits over and above existing systems.

Author’s Bio

Aarush Venkatesh is a second-year law school student from Jindal Global Law School and a member of the Economics and Finance cluster of Nickeled and Dimed. He is curious to learn more about the influence of law in the evolution of technology. He is also interested in reading and writing on topics around the relationship between international relations, trade, law and technology in the modern global discourse.

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