CBDC adoption may take 2-3 years as banks struggle with tech, incentives

With commercial banks still in the process of developing technology to trade through Central Bank Digital Currency (CBDC), it may take two to three years for large-scale adoption of the digital rupee, according to a senior official from Clearing Corporation of India (CCIL). In addition, trading via CBDC has limited benefits. 

CCIL facilitates the settlement of secondary market transactions in government securities and call money market transactions, using the digital rupee. This includes both outright purchases and repurchase agreements (repos). According to the official, while trading in CBDC, the settlement takes place transaction by transaction, while the net settlement takes place at the end of the day. “There are no additional benefits for banks and market participants to use CBDC... Moreover, banks have yet to develop the system to operate via CBDC,” the official said.

  CBDC is a legal tender issued by a central bank in digital form. It is similar to sovereign paper currency, but takes a different form. It is exchangeable at par with existing currency, and can be accepted as a medium of payment, legal tender, and a safe store of value. It appears as liabilities on a central bank’s balance sheet.

  In a recent speech, Reserve Bank of India Deputy Governor T Rabi Sankar said the regulator is in no hurry to launch CBDC nationwide, as its best use case — cross-border payments — requires other countries to simultaneously introduce their own CBDCs for it to be effective. At the same time, the pilot is progressing well, with the user base in India now expanding to about 7 million, he said.

  Money market participants highlighted that most private sector banks are unwilling to trade in government securities and call money market via CBDC, owing to lack of additional incentives and the long process of transaction settlement.

  A dealer with a public sector bank said, “Except 2-3 private banks hardly any other private bank trades via CBDC. Though public sector banks do trade in CBDC due to moral suasion. This has contained the volumes in CBDC trades.”

  To broaden the scope of wholesale CBDC, RBI has expanded the pilot by including four standalone primary dealerships. However, dealers at primary dealerships said they face operational challenges. “Primary dealers use a leveraged balance sheet, which means most of their assets are funded through repo borrowing. As a result, they do not have unpledged securities available and often face a shortage of funds in real time,” said a dealer with a primary dealership.

  The RBI began pilot projects for both retail and wholesale CBDCs in late 2022. According to its annual report, as of end-March, the retail CBDC pilot had expanded to 17 banks and 6 million users since its inception in December 2022.