But what will the much-awaited CBDC rollout mean for India? In her budget speech last year, the Finance Minister said that the introduction of the Central Bank Digital Currency (CBDC) will give a big boost to India’s digital economy.
In simple terms, CBDC is the existence of currency in digital form. For owning a digital rupee wallet and receiving payments, one doesn’t need a bank account similar to cash. However, to load the wallet one will have to link it with a bank account. In 2022, the RBI launched both the Wholesale CBDC (CBDC-W or e₹-W) and the Retail CBDC (CBDC-R or e₹-R) with CBDC-R on a pilot basis for the Indian market. As per the data compiled from state-owned banks, since the launch of the pilot wholesale CBDC, trades worth Rs 7,140 crore were settled using the digital rupee in November. Be it banks, NBFCs, Government-owned PSUs, or the Judiciary- every player in the system needs to work towards building trust and confidence among users to make the adoption of the digital rupee more efficient and effective.
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Digital currency- Shaping the future of the payments ecosystem
Currently, the Indian payment industry is at a point where the economy is gearing up to adopt secure digital payment modes which are cost-effective, seamless, trustworthy, and transparent. The CBDC rollout shows that the industry is now at the forefront of technology, constantly disrupting innovation in the payments space. The following measures can be implemented to enhance the adoption of CBDC:
Educating people is key
While many initiatives have been undertaken, the most crucial factor for the adoption of the right form factor will be educating and imparting knowledge about CBDC-based transactions. The government must create a supporting environment, especially in rural areas where penetration of digital payments can be challenging due to low literacy rates, limited know-how and poor connectivity. Lack of awareness and concerns around data security are the most common reasons why people are less likely to accept digital currencies.
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However, we must establish trust in the system to overcome any barriers or discomfort with transactions without the use of physical cash. Moreover, community-based organisations could organise training sessions to improve financial literacy rates and assist those who are less adept at using digital tools.
Empowering people with financial knowledge and decision-making skills will equip them to adapt faster to the CBDC implementation and navigate the rapid evolution of payment methods.
Fulfilling unique user needs
In a fast-changing payments landscape, the CBDC has to be designed in a way that it can define and address the unmet needs of the majority of the population. This can be done by analysing specific market segments and user personas to understand consumer demand. These results could potentially influence public consultation and communications on CBDC and help the central bank incorporate user needs by designing a flexible core system.
As the world of payments continues to evolve in this digital age, CBDC can be developed to combine innovative features into a single product. For instance, people put a lot of importance on anonymity. Similar to physical cash transactions, intermediaries don’t have access to the consumers’ transaction data and this anonymity factor that drives consumers’ privacy is an added advantage of the digital currency.
This will step up the adoption of CBDC as a safe payment instrument offering the unique advantages of the central bank money including settlement finality, liquidity and integrity. The key drivers here are assurance of the protection of the data and addressing privacy concerns. Regulatory and compliance measures to protect the data are a prerequisite for digital currency to survive and grow. People will embrace CBDCs only when their privacy concerns are addressed.
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Increasing internet and smartphone penetration
Another key measure for CBDCs to empower people will be improving the existing payments infrastructure and accessibility to the internet across semi-urban and rural India. Governments and private internet firms must join hands to build an affordable and robust internet infrastructure. This will enable people to use mobile wallets for CBDC-based transactions in low-bandwidth areas. For this, the usage of lite front-end user applications becomes more crucial. If merchants are able to integrate CBDC into their existing payment functionality through new solutions, CBDC payments could potentially be available on existing networks.
In addition, CBDC transactions also require mobile providers to increase smartphone penetration for users to access their accounts, quickly download apps and set up their accounts. Over the last decade, India has seen exponential growth of technology enablers, smartphone penetration, and fast and low-cost internet services. The growth of digital tools will go a long way in ensuring the adoption of CBDC-provided technology is accessible to everyone, everywhere.
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Making offline payments a reality
The widespread use of offline digital modes of payment across India has already laid the foundation for digital currency. Since the pandemic, India has witnessed a surge in digital payments using mobile devices, wallets, and cards. But the adoption of digital payment was low in areas with poor internet connectivity or no internet access. Though the usage of smartphones in the country is quite high, even then 30-35 percent of the consumer base is still using featured phones in urban and rural India.
In view of this, the RBI proposed a pilot scheme for small-value payments in offline mode. From September 2020 to June 2021, three pilots were successfully conducted across India. These involved 2.41 lakh small-value transactions worth Rs 1.16 crore. Given the encouraging results of this exercise, the RBI has announced the introduction of a nationwide framework that will help in boosting retail digital payments in offline mode.
To make offline payments more efficient, the RBI also launched UPI 123Pay in March 2022 and UPI Lite in September 2022. While consumers need a smartphone for UPI and UPI Lite, you can transact via UPI 123Pay by simply using a feature phone. The introduction of projects like UPI Lite and UPI 123Pay will improve payments in areas where network and internet connectivity is low and play a significant role in increasing financial inclusion in rural India.
Similarly, the adoption of digital currency will be far greater, especially in rural India, if we integrate elements of offline digital payments framework into it. With the issuance of CBDC, the central bank must find ways of offering a secure and reliable digital version of cash, whether or not a person has access to the internet. This could be through the exploration of offline modes with built-in security features for safeguarding the interest of users. It is critical that CBDC is widely available to everyone and connects the population to the government’s vision of actualizing innovation in financial services.
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Alleviating privacy concerns and enhancing data protection
A 2021 paper by the World Economic Forum highlighted cybersecurity threats such as credential theft and loss, digital, counterfeiting, fraud and other types of cybersecurity risks that may affect new platforms like CBDCs. The government and the central bank must work on addressing these privacy concerns and ensure that the CBDC system must incorporate the highest standards of security, resilience, and reliance. For example, the Bank of Canada is experimenting with quantum computing as a mechanism for tackling complex security challenges. Quantum computing is the next-generation technology that provides cyber security risks for existing digital payment systems.
The way forward
As a new vehicle for monetary policy, CBDC can lay the foundation for driving financial inclusion, reducing fraud and money laundering, promoting efficiency in the markets, and also bringing about financial and economic stability. However, there will be a strong uptake among consumers only when they are assured of seamless digital payment services. That is when we will truly be able to realise the Government’s vision of creating a digitally empowered society.
(Adelia Castelino is Co-Founder and Managing Director, In solution Global PVT Limited. Views are personal)