71. CBDC — eRupee
Our CBDC will be called “eRupee” (do not confuse it with e-RUPI, the miracle product which vanished like Mr.India!).
On 1st November, RBI launched wholesale eRupee with 9 banks and gearing up to launch retail eRupee.
RBI/India is one among many central banks that are researching, experimenting, piloting and launching their own CBDCs.
Why are so many countries working on CBDC including India?
Because CBDCs can (potentially):
- Reduce usage of paper cash and provide something similar to ‘cash’ but in digital form
- Reduce cost of issuance, distribution and transactions
- Make cross-border transfers faster and cheaper
- Lower settlement risks
- Counter private virtual currencies (aka crypto currencies) and provide something similar to virtual currencies without the risks that come with those
Let’s take a step back and start with the basics:
What is CBDC?
CBDC (Central Bank Digital Currency) is a legal tender issued by the RBI in a digital form. It is the same as sovereign currency and is exchangeable 1:1 with fiat currency (i.e. INR)
We have (will have) three types of monies — Cash, Digital money (the one in our bank a/c) and CBDC (eRupee). Here is the comparison:
- Differences: (1) CBDC is the liability of RBI where as our existing money is the liability of banks, (2) require different rails or modify existing rails for transactions and transfers
- Similarity between CBDC and Digital money: Form factor (digital)
- Similarity between CBDC and cash: Fungible, non-interest bearing and anonymity (to some extent)
- Similarity among all 3 types: exchangeable at 1:1:1
eRupee: Shape and Form
All fancy… How does it work for me?
- I will get eRupee from my bank (not for free though… I have to convert some of INR)
- I won’t need bank account to hold eRupee but I think, I will need some sort of wallet (on-mobile) to access it
- I will not earn interest on eRupee
- I can transfer it to my friend; my friend will have to validate whether it is genuine
- I can make e-Commerce purchases; eRupee will be shown as separate payment mode (because it is different money than the one we have)
- We may use same rails (e.g., UPI) for P2P and/or P2M payments
- I can exchange it with regular INR through my bank (1:1)
What will work in favour of CBDC — eRupee?
- Curiosity and interest of retail customers, businesses and banks (We get curious (and visit) when new panipuri stall opens… why not for CBDC :)
- Cheaper processing cost: UPI is free for customers but not for the banks. The banks do incur cost (infra, operations etc.). If the cost of eRupee transactions is lower than UPI then… yes, then banks will promote it.
- Lesser risks so eRupee will have lower cost structure than other traditional instruments
- Strong use cases in areas of cross-border payments (they say) and inter-bank transactions
Challenges ahead for CBDC-eRupee:
A. We have Multiple Real time payment solutions:
We have many payment solutions that work in real time and are cost efficient. Also, we have UPI. So what is that eRupee will do extra?
B. Education:
We will have three types of ‘money’… and will create sufficient confusion and users will have to learn a new thing. Once again the ecosystem has to spend effort on education. (I pray there won’t be another pandemic to fast track the learning curve which UPI got)
C. Plenty is a problem:
Even if eRupee becomes popular, RBI/banks will not issue ‘a lot of these’ because it may lead to loss of deposits to banks; and that will create problems in credit creating capacity.
D. No Interest:
This could be a buzzkill… If one has to hold digital money without earning interest then there is a ‘wallet’.
D. Cross Border Story:
Popular opinion is that CBDC will make cross-border transfers cheaper and more efficient.
- Why is the present cross-border payment system expensive? — Is it by design so banks can make more profit? How will one make sure banks won’t do it with CBDC?
- Cross-border payments have higher compliance. Those compliances add to cost and time. Is RBI planning to reduce compliance for CBDC? If no, then how will it be efficient?
- If 100 countries have 100 CBDCs that run on different protocols then how will the cross-border transactions become faster/efficient? We would need a common protocol (similar to SWIFT) so these 100 CBDCs can talk to each other. And yes, SWIFT is building a protocol for CBDCs. (New money, same problem and same solutions :))
E. Acceptance Infrastructure:
Building new acceptance infrastructure will not a mammoth task. Alternatively, we can ride on existing rails such as UPI, IMPS, QR etc. So we need new rails or modify existing rails.
E. Alternative to private virtual currencies:
We are assuming that people are interested in crypto currencies because of its utility… But was it the case?
I think mostly, people were in ‘crypto’ to make easy money. But can they make similar money on eRupee? NO
Then will they be interested in this boring money that won’t even earn interest let alone make them rich overnight?
F. Is it an alternative to Cash:
Different people have different reasons for using cash such as convenience (cash is easy), avoiding taxes (professionals and businesses), and hiding from authorities (bribes).
So, I assume a few will move to eRupee (because it is new) but the cash hoarders will continue to hoard it in physical form because it is completely anonymous.
Note: If GOI legalises bribes via eRupee then definitely eRupee will beat UPI or any other payment mode… think about it!
We are in the early stages of CBDC… in fact, the entire world is in the early stage… It is too early to say whether CBDCs will succeed or fail.
Majority of the Indian population doesn’t have money or has very little money… but those who have money are blessed with amazing payment products (Felt a bit strange while writing this line!)
We should be proud that we innovated those… And we shouldn’t be left behind when it comes to CBDC. Wheel of innovation should keep spinning and the work RBI and other companies will do in the area of CBDC will not only be important but also quite interesting!
