India eyes extension of CBDC pilots to money market instruments, securities tokenization

The Reserve Bank of India (RBI) is exploring the possibility of using its central bank digital currency (CBDC), or the e-rupee, in commercial papers (CPs) and certificates of deposits (CDs) on a trial basis.

CPs are short-term debt instruments issued by companies to raise funds, while CDs are fixed-income investment instruments that can be taken out by investors from financial institutions and commercial banks. 

“Going forward, other instruments like commercial papers and certificates of deposits will be tried out in the pilots along with securities tokenisation features,” RBI Governor Shaktikanta Das said at the BIS Innovation Summit 2024 at Basel, Switzerland.

The RBI started its first digital rupee pilot in the wholesale segment on November 1, 2022, while the retail digital rupee pilot began on December 1, 2022. India has about 4.3 million retail users of CBDC. An additional 400,000 merchants are also using the e-rupee.

The RBI chief added that the e-rupee can be made anonymous through permanent deletion of transactions, thus addressing privacy concerns and bringing it to par with paper currency. 

“Anonymity can be addressed through legislation and/or through technology. For example, through permanent deletion of transactions. The basic principle is that CBDC can have the same degree of anonymity as cash, no more and no less,” Das said. 

To further bring the e-rupee to par with cash, Das said that the RBI is looking at making the CBDC transferable in offline mode as well, just like paper currency, which does not require network connectivity for transactions.

In February, the RBI said it is looking to enable additional functionalities of programmability and offline capability in CBDC retail payments. While programmability is expected to facilitate transactions for specific and targeted purposes, offline functionality will allow transactions in areas with poor or limited internet connectivity.

“While the number of [CBDC] transactions have reached a high of 1 million a day, we still see preference for UPI among the retail users. We, of course, hope that this will change going forward,” Das said. 

Unified Payments Interface, or UPI, is a popular instant payment system in India that facilitates inter-bank peer-to-peer and person-to-merchant transactions.

“We have leveraged the existing merchant infrastructure on the UPI to facilitate CBDC transactions. We have also enabled interoperability of CBDC with UPI,” Das added.

The RBI is looking to introduce the digital rupee in the call money market and plans to use CBDCs as tokens for call money settlement. The central bank has also started discussions with the Hong Kong Monetary Authority (HKMA), the U.S. Federal Reserve, and the international payment platform SWIFT to explore cross-border payments for CBDCs.

According to a PwC report, “Counterfeits are a huge risk, with the RBI reporting an increase in fake 2,000 and 500 currency notes in fiscal year 2021–22. A major risk with carrying cash is the risk of loss or theft. e-Rupee gives central banks better control over usage and distribution. This is one of the primary motivations for the RBI to launch CBDC.”

“Launching the e-Rupee in India would also mean taking a step towards a digital economy, given the rise in the adoption of mobile and internet-based payments, besides improving the cumbersome cross-border transaction process,” the report said. 

Although the RBI has set no specific timeline for the ‘full-fledged’ launch of its CBDC, it plans to make its e-rupee accessible to more retail users by including non-bank payment system operators to offer CBDC wallets. The move is expected to test how resilient India’s CBDC platform is in handling multi-channel transactions.

“CBDC pilots in the retail and wholesale segments are underway with more use-cases and more participating banks. Continuing with this approach, it is proposed to make CBDC-retail accessible to a broader segment of users in a sustained manner, by enabling non-bank payment system operators to offer CBDC wallet,” RBI said in a statement last month. 

“This is expected to enhance access and expand choices available to users apart from testing the resiliency of the CBDC platform to handle multi-channel transactions. Necessary changes will be made to the system to facilitate this,” the statement said.

A CBDC is a digital form of currency notes issued by the country’s central bank. As many as 130 countries, representing 98% of the global gross domestic product (GDP), are exploring a CBDC.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: India is going to be the frontrunner in digitalization