The government may have to frame a law allowing retail users making low-value payments in the recently launched digital rupee to delete the transaction footprint as the central bank digital currency (CBDC) is equivalent to cash that must offer the same degree of anonymity to the bearer, a person with direct knowledge of the matter said.
About 16,000 users have so far made payments worth ₹64 lakh in 160,000 transactions since the launch of the pilot for the digital rupee.
“In cases of transactions via CBDC, digital footprints are unavoidable. But, like physical notes, some degree of anonymity – up to a threshold – is required, which will require both legal and technical interventions in an appropriate time,” the person cited above said, requesting anonymity.
A second person, associated with matters related to currency management said the Reserve Bank of India (RBI) has already launched the pilot, and based on the experience changes will be made in the digital currency system for retail use. RBI’s pilot in the retail segment — digital Rupee-Retail (e ₹-R) — was launched on December 1, 2022, within a closed user group.
“Even today, while using physical currencies, you need to declare your PAN for high-value payments above ₹50,000. Thus, legally, anonymity is needed for only low-value payments,” he said.
Proper evaluation of the CBDC system could be carried out when the user volume will assume critical mass.
“We are expecting the total number of customers [retail users] to reach 50,000 by the end of this month and 15-25 lakh in four to five months. Then proper analysis could be done,” the first person said, adding that the central bank is taking a cautious approach on the matter.
Due to high-value transactions, “complete anonymity” may not be an issue for the wholesale segment, the second person said. RBI launched the pilot of CBDC in the wholesale segment — digital rupee-wholesale (e ₹-W) — on November 1, 2022, with the use being limited to the settlement of secondary market transactions in government securities, minister of state for finance Pankaj Chaudhary told the Lok Sabha on December 12.
“Use of (e ₹-W) is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk,” he said.
Currently, four banks are participating in the retail CBDC pilot, but eventually all banks will join it, the first person said. So far RBI has identified eight banks for phase-wise participation in the retail pilot. The four banks participating in the first phase are State Bank of India (SBI), ICICI Bank, Yes Bank and IDFC First Bank. Next in line are Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank, according to the second person.
According to the minister, the e ₹-R 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. It is being distributed through financial intermediaries, i.e., banks. “Users will be able to transact with e ₹– R through a digital wallet offered by the participating banks. Transactions can be both Person to Person (P2P) and Person to Merchant (P2M),” he said. The e ₹-R offers features of physical cash like trust, safety and settlement finality. Like cash, the CBDC will not earn any interest and can be converted to other forms of money, such as deposits with banks, he added.
The first person mentioned above said the government is in talks with three countries for cross-border payments in RBI’s central bank digital currency (CBDC). “It may happen either through the official Indian platform or through their own systems via a secure application programming interface (API),” he said while declining to disclose names of the countries due to confidentiality arrangements.
He said the system may also help in internationalisation of the rupee as half-a-dozen countries have already agreed to conduct trade with India in the Indian currency. “About 30 banks have opened vostro accounts. Over-dependence on one currency for trade is not prudent. Even private businesses would like spreading out their risks,” he said.