RBI’s E-Rupee Could Be A Long Pursuit With Limited Upside

The Reserve Bank of India’s plans to issue a digital version of the rupee—called e-rupee—are likely to take long to come to fruition and might end up having a limited set of benefits.

“For doing a pilot, the paper also mentioned that certain legal requirements will have to be done, they have invited comments...my sense is that the even the pilots may not come in any time soon,” said Subhash Chandra Garg, former finance secretary of India.

Issuing a public-facing digital currency has certain benefits but the upside is limited when it comes to wholesale banking, he said.

On Oct. 9, the RBI released a concept note on India’s proposed central bank digital currency. The note detailed some of the central bank’s preferences and an overview of how the digital currency could work.

About 105 countries—representing 95% of the world’s gross domestic product—are currently exploring a CBDC launch, according to data from The Atlantic Council. Of the group, 15 are conducting pilots for their digital currencies.

When it comes to India’s CBDC, the RBI is engaged “in working toward a phased implementation strategy”, the concept note said. The central bank is exploring the option of issuing an account-based CBDC for wholesale transactions and a token-based CBDC for retail uses.

According to the RBI’s concept note, a wholesale CBDC—for interbank transfers and wholesale transactions—has the “potential to transform the settlement system”. Such an instrument would make capital market financial transactions more efficient and secure. It would also help counter-parties avoid the need for collateral to manage settlement risk.

“In effect, wholesale CBDCs could make central bank money programmable, to support automation and mitigate risks,” the note said.

According to Garg, however, existing systems for wholesale transactions are adequate already. “The settlement today—whether it’s real gross transfers or otherwise—is a flawless, default-less settlement which takes place today and that also is done on the RBI books.”

But Sharat Chandra, vice president of research and strategy at EarthID and a blockchain expert, said a wholesale CBDC would be a necessary addition from a cross-border payments standpoint. “In the current system, you have a counter-party settlement risk. But when two sovereign nations are exchanging goods and services with their own sovereign currency, it may not be dollar denominated.”

While blockchains may work as a technology for the wholesale CBDC, they’re unlikely to succeed for the retail version, he said. “Blockchains are not mature enough or scalable enough to support that.”

Among the RBI’s stated aims for offering a retail CBDC is to provide people the “same experience of dealing in currency in digital form, without any risks associated with private cryptocurrencies”, the concept note said.

Reduction of costs associated with management of physical cash, improving financial inclusion, exploring cross-border payments via CBDC and supporting innovation in payments are also among the reasons cited by the RBI.

A retail CBDC “will provide a safe, central bank instrument with direct access to the central bank money for payment and settlement”, the note said.

Though the RBI has admonished cryptocurrencies on multiple occasions, two executives at crypto exchanges said comparing sovereign currency with crypto tokens would be unfair.

The e-rupee is an interesting idea but India also has multiple digital payment channels which could dim its public appeal, the founder of an India crypto exchange said on the condition of anonymity.

Chandra said a retail CBDC may impact circulation of stablecoins—crypto tokens pegged to fiat currencies—but it’s unlikely to dim demand for crypto tokens for use cases like gaming.

“It’s only for the physical retail [transactions] where the digital CBDC will actually be making some real value addition,” Garg said.

To facilitate digital activity, it’s necessary to have an appropriate form-factor for the currency and hence a CBDC to facilitate retail transactions would make sense, Garg said. “The central bank’s job is to provide the most appropriate kind of currency, that’s all it is.”