CBDC: Has RBI monetary policy injected a new life into the digital currency?

CBDCs would be programmed to help cater for specific end uses and also make it usable in areas with poor or no internet connectivity.

The Central Bank Digital Currency (CBDC) just got another shot in the arm, in RBI Governor Shaktikanta Das’s Monetary Policy speech on February 8. To make the CBDC more appealing to a wider set of users, Das said that the digital currency would be programmed to help cater to specific end uses and also make it usable in areas with poor or no internet connectivity.

“CBDC-R has seen a modest adoption in its pilot phase so far. The new uses proposed now would open up digital payment opportunities in areas where the Unified Payments Interface (UPI) may also have limited adoption,” says Parijat Garg, a digital lending consultant.

How will it work?

Often, instead of a cash gift, people present a gift voucher from retailers and online companies, such as Westside, Shopper’s Stop, MakeMyTrip, Yatra, Nykaa, etc. on special occasions to friends and family. These vouchers can be redeemed only at certain shops by the recipient. In much the same way, CBDC-R can be transferred to users’ accounts and this money can be used only for specific purchases.

Experts say that even governments might now be able to use CBDCs. “Since this currency is programmable, end-use of CBDC-R can also be fixed and it can be a great way to distribute government subsidies,” says Anshul Gupta, Co-founder and CIO, WintWealth. For instance, if the government issues a fertiliser subsidy, it can ensure that the money is only used to purchase fertiliser by the user.

“Pre-programmed use cases in CBDC-R should substantially reduce governance-related concerns and will also improve end-use monitoring of money provided for a specified purpose,” says Amey Pathak, Partner (Co-Head – Banking & Finance), Cyril Amarchand Mangaldas. It will also take us a step closer to smart contracts, wherein commercial terms agreed to between parties can be programmed directly, providing a greater degree of comfort to contracting parties.

Similarly, corporates will be able to program specified expenditure, such as business travel, for their employees.

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“This announcement from the RBI will make the benefits of the CBDC-R accessible to a wider set of users and further deepen the penetration of digital payments,” says Anand Kumar Bajaj, Founder, MD, & CEO, PayNearby. For instance, picture a program reimbursing bills and covering medical treatment for end users or donations for medical purposes.

Additional features such as validity period or geographical areas within which CDBC-R may be used can also be programmed. For instance, suppose it’s a time-bound transfer, “the currency will expire if not used within, let’s assume, one year,” says Gupta. He adds that in extreme scenarios, governments can use this to increase time-bound consumption in the economy or in certain sectors.

Gupta believes that if CBDCs can be programmed for conditional payments, they would be a game-changer. In this, the payment settlement only happens when certain conditions are met. For instance, once the supplier sends the goods, invoice payment happens automatically after 90 days.

The CBDC-R pilot currently enables Person to Person (P2P) and Person to Merchant (P2M) transactions using digital rupee wallets provided by pilot banks. Some of the pilot banks are State Bank of India, ICICI Bank, Yes Bank, IDFC First Bank, Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank.

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How will offline functionality work through CBDC-R?

The RBI proposed to introduce an offline functionality in CBDC-R to enable transactions in areas with poor or limited internet connectivity. Multiple offline solutions (proximity- and non-proximity-based) across hilly areas, rural and urban locations will be tested for this purpose. These functionalities will be introduced through the pilots in a gradual manner.

“For retail customers, these advancements offer unprecedented flexibility and convenience, especially in areas with limited internet connectivity,” says Rohan Rai, Associate Partner, RR Legal Partners LLP. The ability to conduct transactions offline opens new possibilities for financial inclusion, bridging the gap for those in remote or underserved regions.

“Several poor network rural zones still largely prefer cash for their local transactions, offline CBDC-R could allow that segment to use digital currency,” says Garg.

“Programmability and offline functionality in CBDC-R promise speed, security, and convenience for users,” says Rahul Jain, CFO, NTT DATA Payment Services India. Faster transactions, both online and offline, will be possible with programmable features and secure offline options.

Also read | How to use digital Rupee to make UPI payments

Implementation challenges 

CBDC ecosystems may be at similar risk for cyber-attacks as current payment systems. So, cybersecurity considerations need to be addressed.

“Implementing such innovative features requires careful consideration of technological infrastructure, cybersecurity protocols, and user education,” says Rai. Overcoming these challenges will be critical to fostering widespread adoption and trust in CBDC-R among consumers, merchants, and financial institutions, he adds.

“As these functionalities are gradually introduced through pilots, it will be interesting to see how they are received by the public and the impact they have on financial inclusion and stability,” says Pranav Bhaskar, Partner, SKV Law Offices.