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Unpacking India’s CBDC Pilots as Country Prepares for Digital Rupee

Last year, India piloted wholesale and retail CBDCs.

The Reserve Bank of India hopes to implement its central bank digital currency nationwide by 2023, but early in its trial, many sources indicated it has encountered obstacles.

India ran two CBDC pilots last year. On Nov. 1, nine banks joined a wholesale CBDC endeavor (CBDC-W). On December 1, Mumbai, New Delhi, Bengaluru, and Bhubaneswar began a retail CBDC (CBDC-R) experiment. Four banks—State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank—participated.

“Now extended to 15 places with Chandigarh as the newest inclusion,” a top official told CoinDesk. “More than 50,000 consumers and 10,000 small and big merchants have been onboarded,” including Reliance Retail, the nation’s largest retailer.

Private sector and Indian individuals use CBDC-R. Wholesale CBDCs increase interbank payments for financial organizations alone. The administration said lawmakers India will issue a CBDC-R in 2022-23, although it’s unclear when.

CBDCs aren’t new to India. According to the Atlantic Council’s Central Bank Digital Currency Tracker, 105 nations, representing 95% of global GDP, are investigating CBDCs.

The Bank for International Settlements has helped certain governments examine CBDC use cases (BIS).

The central banks of Israel, Norway, and Sweden are investigating how CBDCs might be utilized for international retail and remittance payments. China, Thailand, Hong Kong, and the UAE are trying Project mBridge. Project Dunbar involved Australia, Malaysia, Singapore, and South Africa.

India has not yet signed a CBDC project, although it plans to. A central bank paper recommended “collaboration with stakeholders, including BIS, on creating common global standards for supporting smooth cross-border transactions.”

India’s geopolitical preparations and public statements seem to conflict.

The RBI has said that the CBDC will offer a simpler, quicker, and cheaper alternative to existing payment rails with the transactional benefits of other digital money.

Privately, India’s geopolitical goal is to oppose the dollarization of the global economy as a developing nation with one of the world’s largest populations in 2023 and the fifth largest GDP.

“In the context of the internationalization of the Indian rupee, an Indian CBDC will make it simpler for the nation to acquire worldwide acceptability since it is digital,” said a CBDC official. “For emerging markets, it is a useful weapon to have for future internationalization.”

Promoting India’s CBDC initiative is its biggest problem. Indians are debating CBDCs, the digital rupee, eRupees, and blockchains.

India’s CBDC policy purpose is unclear. Even Infosys co-founder and biometrics-based unique identification program creator Nandan Nilekani has requested answers.

India’s CBDC has sought to “modernize the present physical (cash) currency system,” according to a senior source. But the public doesn’t know what that entails. India has initiated “awareness” advertisements warning residents about the hazards of investing in cryptocurrencies, comparing them with CBDC initiatives.

The Indian government has used media to explain CBDCs and their uses.

CBDCs and their prospective importance in India’s economy have been covered by government-run and corporate outlets in recent weeks.

News media formerly promoted crypto exchanges and trade material.

The Advertising Council of India’s crypto-ad requirements need disclaimers declaring crypto goods “extremely dangerous” and unregulated, which may explain the move.

“Pushing for education surrounding CBDCs,” an official working on CBDCs told CoinDesk.

The person said RBI launched the pilot fast. “So, they [media and financial experts] are astonished and talking about it.”

The Unified Payments Interface has made India cashless (UPI). UPI lets people pay for groceries and other things with a QR code connected to their bank account, which immediately sends money to the merchant’s account.

According to RBI Governor Shaktikanta Das, a CBDC will eliminate the requirement for a bank middleman.

Banks issue UPI. A CBDC awareness advocate noted, “This is central bank money.” This will offer all the benefits of actual cash without the hazards. This is a monetary system, not a payments system like UPI.

Cash is easier to take, launder, and counterfeit.

CBDCs provide cash-like anonymity, unlike UPI, according to RBI Deputy Governor T. Rabi Sankar.

“How things evolve will determine what happens,” Sankar added. However, money requires anonymity. It differs from UPI, which has a digital trail and is not anonymous.

Unlike UPI, the CBDC doesn’t require buyer-seller bank settlement time.

The central bank’s “primary motives for considering the issue of CBDC” include “fostering financial inclusion,” according to a whitepaper.

CBDCs require bank accounts. If the bank and city are in the pilot, your bank can construct a digital wallet and transfer funds to it in collaboration with the RBI. Then CBDC transactions can begin. RBI records transactions. According to a CBDC spokesman, the approach will eliminate bank settlements, making the payment system more efficient.

The employee indicated the CBDC doesn’t require a bank account, but this has to be checked. Non-banked citizens cannot utilize UPI.

The RBI-authorized entity that opens rural digital wallets will do KYC checks. Digital wallets do not require bank accounts. “This depends on each pilot,” the spokesman stated.

The CBDC might bank the unbanked, but Indians prefer to save at home.

A 2017 World Bank analysis stated that over 80% of Indian people had bank accounts, yet a Finance Ministry poll found that 52% prefer to save at home.

According to an RBI insider, money you take out of your bank account to deposit in your CBDC wallet will not earn interest.

The CBDC will “dramatically” lower operational expenditures by decreasing the yearly currency expense.

UPI can currently promote the government’s digital India and cashless society goals. WHO estimates that UPI’s yearly running cost may surpass 8400 crores INR ($1 billion). The Payments Council of India estimates $664 million in yearly losses. The government says savings from using less cash will cover this loss.

Printing and managing currency costs India $600 million. India’s $3.18 trillion GDP is 14% cash. India is considering lowering this component.

The cost decrease may not be worth the benefits.

A source stated the central bank will fund CBDC infrastructure. The central bank would manage millions of Indians’ digital vaults financially.

A senior CBDC official said the RBI does not “envisage a picture without UPI,” but the CBDC might replace UPI.

“They appear to compliment each other. CBDC will seek cash. UPI can be rejected if comfort grows. “Let it compete,” the top official responded.

After UPI’s success, it’s uncertain if the government will incentivize CBDC use.

Finance Minister Pankaj Chaudhary told parliament that the CBDC, now in testing, uses blockchain technology.

“It’s half DLT and part API,” explained the senior official. “We’re testing technology. Other technologies may serve India’s people. It’s not difficult, but we want the greatest technology.”

India’s CBDC and blockchain relationship are unclear because the API is not blockchain-linked.

“It’s a closed user group, and we’re attempting with restricted numbers to verify the tech and every element, from creation to usage, and it’s functioning great. “It will gradually grow to other cities and more users,” added the same senior official.

The crypto sector envisions using crypto as a money to acquire and sell products and services. However, the Terra, Three Arrows Capital, and FTX exchange crypto contagion revealed concerns.

CBDCs allow the public to utilize private virtual currencies without the hazards of the crypto business, according to the central bank.

CBDC applications are unknown.

One CBDC employee informed CoinDesk that retail CBDC may be programmed. For instance, government subsidy tokens might only be used for project items.

We are exploring offline payments and programmability. “Based on our experiments, we will have the greatest CBDC with the finest characteristics,” stated the official.

The central bank and government want India’s soon-to-be-largest population to use CBDCs for reasons other than technology.

CBDCs have been seen as geopolitical weapons that might shift the global financial system or provide one nation an edge. China’s CBDC exploration is dangerous. An Oxford University law faculty study has extensively explored this. Deutsche Bank believes CBDCs might threaten the currency. Former U.S. officials and scholars even staged a “war scenario” to determine how a Chinese CBDC may affect geopolitics.

16 of the 19 G-20 countries—the 19 largest economies plus the EU bloc—are developing or piloting a CBDC.

According to a government official, the Indian central bank’s entourage of around 20 persons has had many meetings since taking up the G-20 leadership on Dec. 1, 2022. India wants to coordinate global crypto rule-making using CBDC framework elements.

CBDCs’ impact on cross-border payments is likewise unclear.

According to sources, India promoted CBDC cooperation on foreign remittances during its G-20 chairmanship.

The RBI thinks CBDCs might reduce foreign remittance costs, speed, access, and transparency for Indians.

The World Bank reported $100 billion in remittances to India in 2022.

The RBI concept paper advised central banks to “incorporate cross-border considerations in their CBDC architecture from the outset and cooperate internationally” to “overcome significant issues pertaining to time zone, currency rate disparities, as well as legal and regulatory needs across jurisdictions.”

In the letter, India states that “security needs to be the key design consideration while creating CBDCs” but promises to release a CBDC by 2022-23.


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