Volumes yet to pick up, CBDC pilot may continue for another year

The Reserve Bank of India (RBI), which is conducting a pilot to test the central bank digital currency (CBDC) in retail and wholesale segment, might extend the testing period by another year as volumes are yet to pick up, sources in the participating banks said.

Volumes need to rise to a level that can comfort the regulator for a full-fledged launch, the sources said.

The pilot for the CBDC-wholesale was started on November 1, 2022 while the pilot for the retail segment was launched on December 1, 2022.

Nine banks were identified for the wholesale pilot, while eight started the retail pilot, and another four joined later. The RBI had issued Rs 1.71 crore to four participating banks based on their indents at the start of the CBDC-retail pilot.

One of the reasons why volumes have not increased in the retail segment, is that users are not aware of the merchants who are accepting the digital currency.

There are about 10,000-12,000 merchants in the retail pilot and around 100,000 customers.

According to sources, online transactions could not be tested because the aggregator — for example a restaurant aggregator — needs to pay a portion of the payment to the restaurant in digital currency. “There is an issue around liquidating the currency here as the restaurant may not accept the digital currency since they cannot use it,” said a source.

One of the biggest challenges is that most customers feel they are comfortable with the united payment interface (UPI) and do not want to experiment with another digital payment interface.

Another issue is the QR code.

“For CBDC, there needs to be a separate QR code. Many merchants are not willing to add another QR code, they already have one or two. If the same QR code for both UPI and CBDC is permitted then the efficacy of the UPI may be hampered,” the source said.

The RBI is exploring the possibility of having different rails for CBDC and UPI within the same QR code. “They need to see if technology allows that,” the source said.

The retail CBDC is in the form of a digital token that represents legal tender. It is being issued in the same denominations as the paper currency and coins and distributed through financial intermediaries, that is, the banks. Transactions can be both person to person (P2P) and person to merchant (P2M).

During the retail pilot phase, access to the digital currency app is given to select retail customers of selected banks — who will be a part of the closed user group. The digital rupee wallet will be like a physical wallet, but in digital form that will be available for download on smartphones with an Android OS.

There liquidity challenges are there on the wholesale side also. For example, banks have to go for immediate settlement for any CBDC transaction. This means, if bank A buys government securities from bank B, then A has to pay B immediately in CBDC. Typically, financial transactions are settled on a net basis as banks often buy securities when they know some funds will come at the later part of the day, and settlement happens at the end of the trading hour. For gross settlement the liquidity requirement is much higher.

Going ahead, the priorities will be checking the robustness of the technology, sources said.

“There is a need to increase the number of customers and merchants to ensure that sufficient evidence is generated before the full launch. Various other use cases of the digital currency also need to be tested,” said another source.