India is pushing ahead with plans to launch an e-rupee, with the aim to have a stable central bank digital currency as concerns about the volatility and oversight risks that have roiled cryptocurrencies globally continue to grow.
The Reserve Bank of India rolled out its first pilot scheme for the e-rupee at the beginning of this month, allowing some banks to use the digital rupee to settle secondary market transactions in government bonds. The RBI now plans to start testing the retail uses of the digital form of the Indian rupee.
“Since it is a digital form of legal tender backed by the central bank, it doesn't have volatility risks like the available cryptocurrencies,” says Supratik Nag, vice president, product management at Maveric Systems, a digital transformation consulting company, headquartered in Chennai.
“It could help reduce transaction costs, increase financial inclusion, and act as a friction-free and inexpensive mode of payment.”
Several countries are exploring the use of central bank digital currencies (CBDCs), including China, which is testing a digital yuan.
In February, India's Finance Minister Nirmala Sitharaman, while announcing the country's annual budget, said that the RBI would launch the blockchain-based digital rupee this financial year, which runs until the end of March.
While it is embracing a tightly controlled central bank digital currency, the government has long voiced concerns about private cryptocurrencies, including Bitcoin.
It fears that such largely unregulated digital assets could be used for money laundering or terror financing primarily due to its anonymous nature.
The RBI has expressed worries about private cryptocurrencies’ potential impact on the financial system and the risks that speculative investors could lose money, arguing that private virtual currencies have no intrinsic value.
Nervousness around cryptocurrencies globally has only increased following the collapse this month of FTX, one of the world's largest cryptocurrency exchanges that triggered a slump in prices of major cryptocurrencies.
Like many countries, India has been struggling to regulate digital assets.
A 2018 order by the RBI banned financial institutions from supporting crypto or digital asset transactions. But the country’s Supreme Court overturned the order in 2020.
New Delhi is currently working on regulations for digital assets. This year, it introduced a 30 per cent tax on income from cryptocurrencies. The digital rupee would not come under the purview of this tax.
“[The] RBI has been exploring the pros and cons of the introduction of the CBDC for some time,” the RBI said in a concept note report last month.
“RBI is currently engaged in working towards a phased implementation strategy, going step by step through various stages of pilots followed by the final launch, and simultaneously examining use cases that could be implemented with minimal or no disruption.”
It lists a host of motivations for having a digital rupee, which include a “reduction in operational costs involved in physical cash management, fostering financial inclusion .... boosting innovation in cross-border payments space and providing public with uses that any private virtual currencies can provide, without the associated risks”.
Industry experts are generally optimistic about the potential for the e-rupee, seeing this as a part of the country's move towards a digital economy, which Prime Minister Narendra Modi's government has been championing, and with digital transactions surging in the country.
“Personally, I think it will be successful,” says Nikhil Kamath, co-founder of alternative asset management company True Beacon and brokerage Zerodha.
The e-rupee could be the “next drastic upheaval” in the financial technology space in India, he adds.
“The launch of CBDC is going to be a revolutionary step,” says Rashid Ali, managing director of Ezeepay, a rural-focused financial technology company in India. “The introduction of CBDC will boost the digital economy. For quite a long time, the RBI has indeed been concerned over private cryptocurrencies such as Bitcoin, and introducing its currency will limit risk while also benefiting people in the same way that crypto does.”
It is a momentous task, however, to develop the technological infrastructure behind the e-rupee, he warns.
“Blockchain technology can eliminate the need for intermediaries like banks and financial institutions to help with each transaction and simultaneously cut down costs,” says Nidhi Manchanda, head of training, research and development at Fintoo, a financial services company.
There are still a few “grey areas” when it comes to its exact usage, which will likely only become clear once it is fully launched.
“It might take some time to make CBDC in full packed circulation as people will take time to get used to adopting the new form of currency,” she adds.
However, as a sovereign currency, CBDC has distinct advantages over crypto, analysts say.
“The fact that the central bank is behind the project gives it a lot of credibility, and the fact that it is being developed in partnership with major banks and financial institutions gives it a lot of weight,” says Mayank Goyal, founder and chief executive of moneyHOP, a neobank.
“The RBI’s plans to launch a digital currency are still in the early stages, and it remains to be seen what exactly this currency will look like and how it will be used.”
Financial experts say a digital rupee would have several possible benefits, including cutting the cost of printing bank notes, minting coins and circulating them.
“Another advantage is that the digital rupee can help to reduce the risk of counterfeiting,” says Mr Goyal. “The digital rupee can help to increase the efficiency of monetary policy. This is because the RBI can more easily and quickly distribute digital rupees to banks and financial institutions in order to implement monetary policy.”
Vivekanand Pandey, co-founder of Kunji, a crypto asset management company, says that one of the major uses of the e-rupee could be in remittances, with India being the largest recipient of remittances in the world.
“Another big issue that the digital currency can address is that it enables financial inclusion for the unbanked population,” says Mr Pandey.
With the e-rupee, it is possible that a specialised card could be used and that the user may not even need a smartphone or a bank account to transact in the currency, he adds.
This would go beyond the uses of India's widespread Unified Payments Interface (UPI), which allows people to make instant payments with their mobile phones, in a system which links their numbers directly to their bank account.
An e-rupee could also play an important role in the distribution of government subsidies to the population.
“Due to lack of proper infrastructure in remote or underdeveloped areas, they may have to stand in queues for hours to encash the money received from these schemes,” says Mr Pandey. “All this dispersal of money can be done instantly with a few clicks and no one has to go to banks to avail these benefits and subsidies.”
But central bank digital currencies are yet to be fully tried and tested, and there are several possible challenges.
“Firstly, there is the challenge of ensuring that the CBDC is secure and resistant to fraud and cyber-attacks,” says Mr Goyal.
“Secondly, there is the challenge of ensuring that the CBDC is accessible to all members of the public, including those who do not have access to traditional banking services.”
“This is particularly important in a country like India where a large proportion of the population is unbanked,” he adds.
Mr Nag says that to ensure widespread adoption of the e-rupee the “RBI needs to initiate financial literacy at the mass level to explain the benefits and usage of CBDCs”.
India will also have to ensure there is some anonymity with its digital currency, analysts say.
“China and the Bahamas are already following anonymity for lower tier transactions to achieve the same anonymity as cash,” says Pinky Hiranandani, an analyst at GlobaData.
While some analysts see India's plans for an e-rupee as a sign of an easing of its stance on virtual assets more broadly, many believe that India is likely to remain wary of private cryptocurrencies.
“Central banks would not like for others to take away the control they have over the money supply, so I think the stance against cryptocurrencies will remain strong – especially after the recent events in FTX,” says Mr Kamath.
