BL Explainer: How will CBDC transactions through UPI QR code work?

While more banks are increasingly offering e-Re wallets to customers, use-cases for the central bank digital currency are yet to pick up 

How is the pilot testing in wholesale and retail e-rupee progressing?

The pilot phase hasn’t gained the expected momentum. As per the FY23 annual report of the Reserve Bank of India, the total value of the central bank digital currency (e-Re), transacted both wholesale and retail, as on March 31, 2023 stood at around Rs 10 crore. These numbers point at a rather slow start.

While the wholesale adoption of e-Re is limited to settlement of secondary market G-Sec transactions, the retail e-Re was poised to be a replacement to the physical currency, though within a limited user group. Yet, the adoption of retail CBDC stood at just about Rs 5 crore in the first four months of its roll-out. Retail CBDC was initially piloted with four banks, though nearly 13 banks offer the product currently.

What is the feedback from users regarding ease of transactions?

It’s still a push product – that is, banks are offering it to their customers, rather than demand flowing from the customers to download the app. The usage is still within the closed user group or CUG, who are usually nuanced and sophisticated customers. Hence, the experience reported so far is positive.

Also read: Good response. Digital currency pilot gains pace; SBI, HDFC Bank step up campaigns

How will interoperability between UPI and CBDC work?

At the merchant-end, e-Re works on the QR scanning mechanism, just like UPI, though the QR for e-Re and UPI are different. Through inter-operability, the intention is to converge the QRs. The same QR code can be used as point-of-sales (POS) for e-Re and UPI payments. This is at the front-end.

According to a recent statement by T Rabi Sankar, Deputy Governor, RBI, efforts are on to converge payments at the back-end as well. That is, a customer making a payment through UPI can be credited to the e-Re account of the merchant and vice-versa. How this will play out needs to be seen. While large and organised retailers operate through non-interest earning current accounts, small traders and merchants use their savings accounts for business. Inward remittances into the e-Re wallet will not earn interest and they may prefer UPI over e-Re, despite the interoperability.

Also read: CBDC: A calibrated approach needed

Will interoperability lead to an increase in users?

That is the intention – to increase the adoption of the digital currency, especially among merchants, given that B2C or the business–to–customer segment accounts for over 85 per cent of total payments. At present, UPI and e-Re require two different POS, which is seen as one of the reasons for the resistance in adopting e-Re. With interoperability coming into play, and the same POS made available for both modes, this issue may be addressed, leading to an improvement in adoption of e-Re.

What more can be done to increase the use of e-rupee?

It would be a gradual process and unless banks get to a position where making the e-Re automatically downloadable to all customers of the bank is achieved, the adoption could be slow. Further, there is still the debate among users that when UPI has become a popular mode of payment, without having to forego interest on one’s savings account, why must one opt for e-Re. Retail CBDC will have to carve out an end-use advantage over UPI for better acceptance among users. Concerns around traceability and anonymity of transactions also need to be addressed if the e-Re is to gain currency, especially in the high-value retail segment.

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