What is the retail e-Re?

E-Rupee (e-Re) is the common name associated with CBDC or central bank digital currency. It is a digital form of legal tender or currency. E-Re could be wholesale and retail. A pilot for the former was launched on November 1, while that for the retail version followed a month later on December 1. Four banks – SBI, ICICI Bank, IDFC First Bank and YES Bank – will participate in the first phase of the pilot and four more banks – HDFC Bank, Bank of Baroda, Union Bank and Kotak Mahindra Bank will subsequently be added to the plan, which would cover 13 cities in a phased manner.

Just like how telecom operators launch products, e-Re will also be tested on closed user groups or CUGs.

Who is it targeted at?

The pilot phase is aimed at customers of those banks roped in for the project, as the aim is to test the efficacy of the product. The full rollout will enable everyone, including you and me, to use it, as e-Re is a digital extension of cash.

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What will be its uses?

The retail version of e-Re can be used by individuals for all transactions, where they use cash to buy things, to give to friends or relatives, to repay debt, etc.

But, to begin with, the uses will belimited as merchants and users would be restricted to the CUG. While there are no specific transaction limits in value or volume terms, in the initial phases, e-Re may be limited to low-ticket usages.

How will it work?

Consider cash being consumed out of the digital wallet instead of physical wallets; that’s the way e-Re would function and it would bear the sovereign stamp. In the pilot phase, e-Re would be a push product. Banks would send out a link to identified customers through an email or text message, whereby the e-Re app could be downloaded. Using the mobile number, the customer verification or KYC would be conducted and upon successful completion of KYC, the digital wallet is good to use.

The user will then be able to transfer money from the bank account to the wallet. Simply put, instead of withdrawing money from an ATM, you are transferring money into a digital wallet. The amount transferred would assume the exact denominations of physical cash and will not earn interest when parked in the e-wallet. Therefore, how much non-interest generating money would a user be willing to accommodate would be a determining factor to gauge the acceptance of e-Re.

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Why is the RBI moving towards the e-Re?

There is a cost incurred in printing, transporting and storing currencies and coins that can be rationalised through e-Re. The larger use-case envisaged by the government is financial inclusion and formalising the digital consumption of money. E-Re is also targeted at those who don’t have a bank account, but can use digital currencies similar to a pre-paid mobile recharge card. Likewise, it is not aimed at just smartphone users, but every person with a mobile phone.

Will usage of e-Re cannibalise UPI?

This is a genuine fear, but UPI can continue to find takers. 

UPI works on a settlement basis between two banks. That is, on the front-end, money transfer happens instantly, but at the backend, it takes about a day for inter-bank settlements to conclude. There is a settlement risk in UPI, since there is an intermediary involved. But in e-Re, there is no settlement risk, since it is issued by the RBI and could also be much faster.

Further, since UPI is a bank-to-bank payment mode, there is a transaction or audit trail it leaves, which e-Re won’t because it is wallet-to-wallet transfer. RBI is likely to allow anonymity in e-Re transactions, at least in the small-ticket ones. Those who don’t want an audit trail will prefer e-Re.

Three, customers are unlikely to be charged anything for using e-Re since usage of cash does not involve any charges. UPI is free now, but could become chargeable going ahead.

Users could shift to e-Re from UPI, if it proves efficient and trustworthy, and does not have technical glitches.

But those who prefer to keep money in bank deposits and make payments using these interest-earning deposits will continue to prefer UPI. 

What could be the challenges with retail e-Rupee?

From a customer perspective, whether merchant or retail, UPI has established ease of use. Therefore, e-Re needs to prove that it is equally user-friendly with sound technology and data privacy provisions, to lure users.

Users also face digital theft such as hacking and virus attacks, which could deter some people. The cultural and social mind-set in the country, which leads to greater use of physical currency, is also a hinderance.