Digital Rupee: A New Chapter in Digital Payments

Considering India’s maturity in digital payments and the stature RBI has gained in the Central Banks Committee, the implementation of the CBDC is visible.

By AP Hota

The budget announcement on the rollout of digital rupee by the Reserve Bank of India (RBI) concluded the debate on whether or not to implement a central bank digital currency (CBDC) and when. The main objective of launching the CBDC has been clearly stated. Stating that the CBDC can be implemented with blockchain or “any other technology,” also set the stage for an endless wait for blockchain technology to mature. Non-conventional DLT stable technology options are plentiful. Considering the maturity the country has gained in digital payments and the stature that RBI has gained in the Central Banks Committee, CBDC implementation in India is now in a visible range. India need not wait for global standards to develop.

The only major economy where a CBDC is experimented with nationwide is China, which was forced to opt for a CBDC given the lack of competition between two major players in digital payments. A few island nations in the Caribbean region and a few countries in Africa introducing a CBDC were mainly driven by the gaps in the availability of digital payment instruments and a much higher degree of exclusion than in India. The aim of introducing the digital rupee in India is to help reduce the usage of banknotes and thereby reduce the ever-increasing cost of printing banknotes/currency and the logistical challenges associated with them. circulate.

In accordance with the currency management system in place, RBI prints banknotes (in multiple denominations) in its captive banknote printing presses in Mysore and Salboni, stores banknotes in approximately 20 currency vaults in its regional offices and feeds about 4,000 currency vaults being managed by commercial banks throughout the country. Once the banknotes are soiled after repeated use, they are brought back to the RBI offices through the same distribution network and destroyed. As the country’s GDP rises from $3 trillion to $5 trillion and the per capita consumption level rises, the demand for banknotes will increase accordingly to meet transactional needs. Unless timely measures are taken, the operational load would severely affect the functioning of the RBI as well as the banking systems. Questions had been raised earlier arguing that digital payments in India with the wide array of payment instruments and channels such as IMPS, UPI, NEFT, wallets, debit/credit/prepaid cards and NETC has made the Redundant CBDC. The rising Digital Payments Index (from the base index of 100 in March 2018 to 304 in September 2021) was cited for this purpose. But there remains a significant gap in the number of active digital payment users (just 200 million against a potential 700 million) and just 15 million points of acceptance against a potential 50 million. Cases of cyber fraud in digital payments and the number of cases reaching RBI banking ombudsmen are high. Under such circumstances, a sea change in the format of the “medium of exchange” through the CBDC, and RBI itself jumping into the fray in managing the digital payments infrastructure, becomes imperative. The go-live schedule being aggressive and the tasks ahead of a lot, the following aspects seem relevant:

Finalize design options: The first task is to finalize the design options, if they are not yet closed. As happens in any technology implementation, this would be an evolutionary process. The search for a perfect solution would be endless. The easiest option to get started in issuing, circulating and serving retail CBDCs is to ride the rails of existing digital payments infrastructure. Since blockchain-based technology has yet to stabilize in any financial application, it may be prudent to start with conventional technology and consider blockchain at a later date; accounts would be better for ease of communication as they can be used almost like wallet accounts. The on-device UPI wallet provided by the National Payments Corporation of India (NPCI) can also be molded for the CBDC. Around 10 major banks can be selected to act as digital rupee distributors, each with around one million willing customers. Questions about anonymity can be addressed as the pilot progresses by an appropriate additional privacy layer. Banks may be incentivized to reimburse the cost of initial technical and system infrastructure changes and recurring transaction fees.

Expand acceptance: The second critical task would be to expand the acceptance infrastructure through steps such as a massive awareness campaign. The Payments Infrastructure Development Fund with an initial corpus of Rs 250 crore provided by RBI has shown remarkable progress especially in Tier 3 and 4 centers. Seen against the digital acceptance target in each kirana store, the funding contribution is certainly meager, and for the next 3-4 years, it is expected to be significantly increased. Wherever cash is accepted, it must be enabled for digital acceptance to build a cashless society.

Digital payment literacy: The third dimension is digital payment literacy. The absence of an MDR benefit for merchants or cashback for customers would not automatically drive digital adoption. To convert the ignorant, the bums, and the reluctant critics, different approaches would be needed. A wide network of commercial correspondents of banks and citizen service centers can be tried as a digital assistant. They must be trained and then encouraged to register again.

A research institution: The fourth task can be to create a research institution exclusively for the CBDC to play a leading role on a global scale, both in formulating policies and also in experimenting with several technologies. There is no doubt that in 10 to 15 years, central banks around the world will opt for digital versions of fiat currency. The global institution can start operating during India’s G20 Presidency in 2023.

Let us now look forward to the start of another chapter in India’s digital payments landscape.

The author is the former Director of DPSS, RBI, and the former Managing Director and CEO of NPCI.

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