Instant Payments Could Stumble Adoption For CBDCs: IMF Researchers

A free, efficient payment system that lets users substitute cash could end up compromising the adoption of a retail central bank digital currency, according to a working paper by researchers at the International Monetary Fund.

Pre-existing instant payments, such as India's unified payments interface, already provide a viable alternative to cash by being zero-user cost, which can limit people's incentives to adopt digital currency, according to the paper.

While a large group of central banks across the globe are researching the CBDC, India recently announced ongoing and upcoming pilots for its digital version of the rupee. A total of 15 countries, including China, Singapore, and Thailand, are currently conducting pilots for their CBDCs, according to data from The Atlantic Council.

"The similarities between instant payments and retail CBDC, especially when operated and settled through a central bank, would be quite strong," the paper stated.

India's CBDC pilot has been envisioned using an intermediated structure, according to people familiar with the pilot. A select group of banks will serve as intermediaries for the pilot and perform functions like know-your-customer checks and money laundering compliance.

The CBDC is akin to real cash, but UPI is just a transfer of balance, a person in the know about the pilot told BQ Prime. This makes the digital currency more like real money, and it scores on UPI since no payment data or usage information will be shared with a third party, this person said.

To further boost privacy, the CBDC will also allow users to delete a transaction from the record once it's completed, the person said.

At a global level, though, instant payments do have a first-mover advantage, as pointed out by the IMF's working paper. Given the level of payment tool substitution that instant payments have caused, cash and checks could very well be headed to near-zero usage eventually, it said.

India's Payments Rejig

India ranks third, after Russia and China, in a list of countries that experienced the most marked shift in payment preferences between 2005 and 2020, according to the paper.

The country's central bank has served as a "catalyst" in the country's implementation of instant payments, the paper said. While cash volumes in the country remain buoyant, they are on a long-term decline, with cards replacing checks being the most marked change, it said.

On the instant payments side, India's UPI offers the same utility as 'Pix' in Brazil or 'Swish' in Sweden. While Pix and UPI have proved immensely popular, Swish doesn't seem to have significantly replaced cash in Sweden despite multiple anecdotal incidents, the report said.

UPI processed more than 7 billion transactions worth Rs 12.1 trillion in October, according to data from the National Payments Corporation of India.