The e-rupee is like wine: It’ll take time to mature

Source: The post is based on the article “The e-rupee is like wine: It’ll take time to mature” published in “Live mint” on 18th October 2023.

Syllabus: GS3- Economy- currency

News: The article discusses the slow adoption of India’s Central Bank Digital Currency (CBDC) compared to the popular Unified Payments Interface (UPI). UPI’s ease of use and first-mover advantage make it dominant. However, CBDCs might be better for international transfers. The e-rupee’s full potential isn’t clear yet.

What is CBDC?

CBDC stands for Central Bank Digital Currency.

It’s a digital form of fiat money introduced by RBI.

Despite RBI’s pilot project involving 3.5 million merchants and 1 million customers, its adoption is slow with 10,000-12,000 daily transactions.

Unlike UPI, CBDC offers a direct promise-to-pay by RBI, similar to cash.

What are the issues with RBI’s CBDC?

Slow Adoption at Retail Level: Despite involvement of 13 participating banks and selection of 3.5 million merchants and 1 million customers, CBDC daily transactions are only 10,000-12,000.

UPI’s Dominance: The Unified Payments Interface (UPI) already offers ease of transacting, safety, low cost, and functionality on feature phones, making it a popular choice over CBDC for domestic transactions.

Awareness Issue: One factor contributing to the slow uptake might be the lack of awareness among potential users.

International Appeal: CBDCs have potential in cross-border financial transfers which are currently costly and can be slow.

Global Interoperability: For CBDC to be effective internationally, it needs compatibility with other countries’ systems.

Potential Tracking Concerns: Unlike cash, CBDCs could allow transactions to be centrally tracked, which might raise privacy concerns.

What is the future potential of CBDC?

International Advantage: CBDCs could have a distinct edge in cross-border financial transfers, offering potential benefits over the current costly methods.

Reduced Dependence: Following the Western sanctions on Russia and its removal from Swift, CBDCs highlight an opportunity to reduce dependence on a Western-dominated system.

Global Interoperability: For CBDCs to be efficient in international settlements, global compatibility is crucial, though achieving it might take time.

RBI’s Role in Banking: The domestic use case for CBDC highlights its potential as a full-safe RBI promise-to-pay. It could change the banking landscape, with RBI possibly becoming the chief deposit holder.

Maturation Before Adoption: The advice is to allow the CBDC to mature, using it mainly for foreign payments initially before widening its domestic use.