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Drop in e-rupee transactions

ICICIdirect 7 Mins 05 Jul 2024

India's digital currency, also known as the Digital Rupee, is a central bank digital currency (CBDC) being developed by the Reserve Bank of India (RBI). It is essentially a digital form of the Indian rupee, issued and controlled by the central bank, just like physical banknotes and coins. In this article, we understand the e-rupee and why there has been a fall in a drop in e-rupee transactions.

What is e-rupee?

An e-rupee digital representation of the Indian rupee, with the same value and legal tender status as physical cash. Aims to provide a secure, efficient, and accessible alternative to physical cash for making payments. Uses blockchain or similar distributed ledger technology for safe transactions.

Uses of digital currency

Let us look at the different uses of digital currency:

  • Faster and More Efficient Transactions: Digital currencies can enable instant and near-borderless settlements compared to traditional methods like wire transfers. It can be particularly beneficial for cross-border payments.
  • Reduced Costs: Eliminates the need for intermediaries and physical cash handling, potentially leading to lower transaction fees.
  • Increased Financial Inclusion: Digital currencies can provide access to financial services for the unbanked and underbanked population, especially in regions with limited access to traditional banking infrastructure.
  • Programmable Money: Smart contracts associated with certain digital currencies allow for the creation of programmable money. It enables the automatic execution of transactions based on predefined conditions, potentially streamlining various financial processes.
  • New Investment Products: The rise of digital currencies opens doors for innovative investment products like tokenized assets and security offerings.
  • Improved Efficiency and Tracking: Digital currencies can track goods and materials throughout the supply chain, enhancing transparency and efficiency. Real-time payments can also be facilitated upon delivery of goods.
  • Reduced Counterfeiting: Certain digital currencies with robust verification mechanisms can reduce counterfeiting risks within a supply chain.

Brief History of e-rupee

Below is the brief history of e-rupee:

Date/Event

Description

Proposed: January 2017

The RBI proposes the concept of a central bank digital currency (CBDC) for India.

Budget Announcement: February 2022

The Indian government announces the launch of the digital rupee (e₹) in its Union Budget.

Internal Working Group: October 2022

The RBI forms an internal working group to study the feasibility and implications of a CBDC.

Concept Note: October 7, 2022

The RBI releases a "Concept Note" outlining the potential benefits and considerations for launching a CBDC.

Pilot Launch: November 1, 2022

The RBI commences a pilot launch of the e₹-W (wholesale version) for interbank settlement of government securities.

Pilot Launch: December 1, 2022

The RBI starts a pilot launch of the e₹-R (retail version) for person-to-person (P2P) and person-to-merchant (P2M) transactions within a closed user group.

Current Status: July 2, 2024

The e₹ is still under development. The RBI is evaluating the pilot projects to determine the future rollout strategy.

Current volume of digital currency transactions in India

As mentioned above, the RBI started a pilot for the e-rupee in December 2022 and successfully reached a target of 1 million retail transactions per day by December 2023. These numbers were raised because banks were asked to push up transactions by offering incentives to retail users and disbursing a portion of bank employees' salaries using the e-rupee. However in recent months, the push has diminished, and, as a result, daily transaction numbers have fallen to about 1,00,000. In other words, there is no organic demand for digital or e-rupee. The RBI is not planning to rapidly expand the pilot and the current focus is on testing the technology and developing use cases for the digital currency.

Reasons for the fall in the number of transactions

Let us look at different reasons for the fall in the number of transactions:

  • Incentive Discontinuation: The RBI has stopped offering incentives to users and banks that participated in the pilot, potentially leading to a drop in usage once the initial motivation subsided.
  • Limited Functionality: The pilot project might be focused on testing core functionalities, with limited features and user base compared to a full-scale launch. It could restrict widespread adoption.
  • Focus on Technology: The primary goal of the pilot was to assess the technical aspects of the e₹. Transaction volume might not be a major priority at this stage.
  • Lack of Use Cases: Without a wider range of use cases and integration with existing payment systems, users might not find the e₹ particularly convenient compared to established digital payment options.

Before you go

Though the numbers are declining, the use cases for digital currencies are vast and continuously evolving. As technology matures and regulatory frameworks adapt, digital currencies have the potential to revolutionize the way we interact with money and financial services.

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