The central bank digital currency of India, the e-rupee, is beginning to make waves with many of us getting messages from our banks, asking us to participate in the pilot test of the retail e-rupee. Some of the more curious among us may have gone ahead and downloaded the app, which appears quite slick and user friendly. Small amounts of money, depending on the level of suspicion towards all things digital, have also been transferred into the e-rupee wallet.

But the adventure hits a roadblock at that level. If you reside in cities such as Mumbai or Bengaluru, you could hunt for merchants who accept e-rupee as payment and buy something with it. But in cities such as Chennai or Jaipur or Pune, the e-rupee in the wallet is unlikely to help you buy anything since the network of merchants accepting the Indian CBDC as payment is almost absent in many cities.

Some of you may have wanted to experiment with money transfers with e-rupee. But finding other kindred souls willing to participate in your experiment is not easy. You may have to scour all your contacts on the social media before finding someone to whom you may transfer a small sum, just for the fun of it.

These are however early days; we are still in the pilot phase. The RBI is testing the user response, technical capability of the infrastructure, security features etc and will be fine-tuning the final product based on this experience. The number of merchant outlets accepting the e-rupee will explode once the QR code of UPI payments are made interoperable for e-rupee payments. More geeks may want to use e-rupee going forward, so finding others with e-rupee wallets may not be this difficult in future.

But RBI may find it challenging to convince the aam aadmi to let go of his wads of paper currency or his other payment wallets and apps and switch to the digital form of rupee for day-to-day usage.

The background

For those who are wondering what this is all about, e-rupee is the digital version of the central bank issued currency and each e-rupee can be converted into similar denomination of the physical currency. It has almost all the qualities of the physical currency — it’s legal tender and can be a store of value.

Wholesale CBDC is used for large inter-bank and business transactions while the retail CBDC is akin to cash transactions made by you and me.

The CBDC was originally envisaged as an alternative to private cryptocurrencies such as bitcoin but now central banks view it as yet another payment channel which will reduce usage of cash in the economy and help check tax evasion.

India as well as other countries are facing immense peer pressure in this sphere since work on CBDC is progressing rapidly around the world. 130 countries are working on this project according to Atlantic Council’s CBDC tracker and 19 of the member of G20 are in advanced stage of CBDC development. Of note is that China has made considerable progress with its pilot project.

But most central banks are taking it relatively slow because the impact it will have on bank deposits, liquidity in the system, the black economy, security threats posed by digitising the entire currency management system etc are still unknown.

Only 11 countries have launched a CBDC till date and they are countries will small population or those which are offshore tax havens such as Bahamas, the countries in the Eastern Caribbean Union, Jamaica, Nigeria and Ecuador.

Why retail users may say no

In other words, none of the larger economies have formally launched a CBDC. While the wholesale e-rupee could be useful in reducing default risk and reducing operational cost for banks, the utility of retail e-rupee is moot.

It will have novelty value and people may begin using it to get some bragging rights. But whether it will scale up and become as well entrenched as physical cash and UPI is debatable.

Let’s evaluate e-rupee against physical cash first. The digital rupee wallet is akin to your cash wallet and you can store digital forms of currency notes and coins in the e-rupee wallet. This can be used to pay at shops or transferred to another individual and so on. The digital rupee is more convenient because you don’t have the hassle of carrying physical currency, getting change from merchants etc. But the question that will come up is, ‘when UPI based payments is already doing all this, free of cost, why should I switch to e-rupee?’

In many instances, cash based payments are used to evade the scrutiny of the tax and other regulatory authorities and to avoid leaving a trail. In other words, anonymity in cash transactions is among the main reasons why cash payments are still preferred by many individuals, professionals, businesses, and service providers.

But the e-rupee, in its current form, does not provide anonymity. Banks will have data relating to transfer in to and out of the wallets. Banks also will be aware of all the transaction from the e-rupee wallet since they will be sending SMS for each of these transactions. So, people who want to avoid money trail will not take to retail e-rupee.

The other set of people who use cash extensively are those in the informal and low-income segments, who do not have enough money to operate bank accounts. Such people will continue to use cash.

e-rupee versus UPI

The other challenge for e-rupee is the all-pervasive usage of UPI in our society now. Retail e-rupee can also be used in lieu of UPI, once the interoperability between the QR Codes is operationalised. The advantage with e-rupee would be that these transactions will not involve the banks since the money is already in the e-rupee wallet and the payment could be completed faster, at least in some instances.

But the most important drawback of e-rupee when pitted against UPI is that the money in the e-rupee wallet does not earn any interest. But since the money stays in savings bank account until the payment transaction is completed in UPI payments, users continue to earn interest income while using UPI. This fact is likely to tilt users in favour of UPI.

Going ahead, if banks start charging a fee for UPI transactions or if anonymity is introduced in e-rupee, then the equation could change. But as things stand now, e-rupee usage at the retail level is likely to stay marginal.

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