Loose Change Is The Bump In India's Retail CBDC Journey
RBI's retail CBDC pilot will need to solve for a key problem, that of loose change.
The Reserve Bank of India's ambition to digitise the rupee via a central bank digital currency has an unusual bump — loose change.
Payments facilitated by united payments interface, cards, and mobile wallets took loose change out of the equation for digital payments but India's retail CBDC is bound by a law which has been in force since before Indian independence.
The RBI Act of 1934 — last amended in 2016 — allows the central bank to issue currency notes in certain denominations such as two rupees, five rupees, Rs 10, Rs 20, Rs 50, Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. Other denominations, not exceeding Rs 10,000, are also allowed, as specified by the central government, on the recommendation of the central board of the RBI.
In November 2016, the RBI had started issuing currency notes under the Rs 2,000 denomination, as it sought to remonetise the economy quickly, after the demonetisation of Rs 500 and Rs 1,000 currency notes.
As the CBDC is just the digital form of the Indian currency, the RBI plans to issue tokens of fixed denominations for its pilot stage, according to a person in the know. While a pilot for the wholesale version of the CBDC is currently ongoing, the retail pilot is due to start later this month.
Since the CBDC is defined as a digital version of cash, it has to play by the same rules. Though the rules could stay limited to the pilot, if the RBI chooses to work with the government on amending the RBI Act.
But as things stand, the denomination requirement also adds technological requirements that make transactions more complex, according to a second person in the know, a tech executive.
The retail CBDC will run on a digital ledger-based architecture where banks act as nodes for the network, according to both the people mentioned earlier. Such CBDC models are called indirect or intermediated models where banks perform checks for know-your-customer or anti-money-laundering requirements.
"In this model, RBI will create and issue tokens to authorised entities called token service providers who in turn will distribute these to end-users who take part in retail transactions," according to the central bank's October concept note on the CBDC.
Enterprise blockchain firms such as Hyperledger and R3 Corda have also been roped in to build the architecture for the retail CBDC, according to the second person quoted earlier. Both the firms have also been involved with other CBDC projects in countries such as Australia, France, Thailand, and Saudi Arabia.
Although the RBI has chosen to go with a distributed ledger CBDC, there are also concerns about the scalability of such a system, the first person said. Reaching a scale similar to unified payments interface will require DLT level inventions that are yet to arrive on the scene, the tech executive said.
A total of eight banks including State Bank of India, Union Bank of India Ltd., HDFC Bank Ltd., ICICI Bank Ltd., Kotak Mahindra Bank Ltd., Yes Bank Ltd. and IDFC First Bank Ltd. are participating in the retail pilot.
The CBDC will work on a wallet-based mechanism and will allow retail users to delete their transactions from the record once they've been completed, according to the first person. This will likely address any privacy concerns with CBDC.
The RBI is also bearing the cost of conducting the pilot, as of now, as it is relatively small, the second person said. Getting from pilot to full-scale rollout is likely to be a staggered journey but the current pace is heartening, this person said.
Once it launches, making people aware about it and encouraging them to transact on it will the next crucial leg of the journey.