India’s central bank, the Reserve Bank of India (RBI), is accelerating its efforts in developing a digital version of its national currency, the rupee. The bank has two central bank digital currency (CBDC) test projects in progress, focusing on both retail and wholesale implementations of the digital rupee, or e-Rupee. As plans to expand the retail pilot and bring in a greater number of participating banks are set into motion, it is essential to analyze the potential advantages and drawbacks of this ambitious undertaking.
The retail pilot, which started in December, has the goal of utilizing the digital rupee as a stand-in for physical currency notes. Eight banks are currently engaged in the pilot, with five more in the process of joining. The wholesale CBDC tests, which began in November, is exploring the use of the digital rupee for settling secondary market transactions in government securities. Nine banks took part in this initial phase.
So far, RBI has described the outcomes of both pilots as “satisfactory and in line with expectations.” Embracing digital currencies has the potential to considerably streamline and reduce the costs of transactions. Settlement in central bank money eliminates the need for settlement guarantee infrastructure or collateral to mitigate settlement risks. The e-Rupee is also touted as a potentially quicker, more comfortable, and cost-effective alternative to traditional cash transactions.
However, there are challenges and concerns to address as well. The technology behind the digital rupee has not yet been fully disclosed. There is ongoing speculation about whether the RBI will choose a centralized payments system, similar to WeChat or Venmo, or a distributed ledger technology (DLT) system. The bank’s official concept note states that DLT systems, in their current form, offer limited capacity.
Furthermore, while India is not alone in exploring CBDCs, with countries such as Australia, China, Hong Kong, and Nigeria also experimenting with the technology, it is still a relatively uncharted territory. There are potential regulatory, scalability, and security issues to tackle.
In conclusion, India’s pursuit of developing the e-Rupee is an ambitious and forward-looking initiative with the potential to transform the country’s financial landscape. However, it is not without challenges, and how the RBI addresses the technology and implementation concerns will significantly impact the project’s success and the nation’s future financial ecosystem.
Source: Blockworks
