Digital future

New features will increase digital currency adoption

The Reserve Bank of India (RBI) has been issuing the central bank digital currency (CBDC) on a pilot basis from late 2022. Based on blockchain technology, in the retail segment, CBDC-R was launched within a closed user group (CUG) comprising participating customers and merchants. The CBDC-R pilot currently enables person-to-person and person-to-merchant transactions using digital rupee wallets. Armed with the experience thus far, the RBI has now proposed to enable additional use cases like programmability and offline functionality, which could not only increase the adoption of the digital currency but also help attain public policy goals. As the central bank explained in its announcement, “programmability will permit users like, for instance, government agencies to ensure that payments are made for defined benefits”. This means that certain built-in rules will impose restrictions on the usage of money.

With such features, the government would be able to ensure that the money is used for the intended purpose. For instance, if the government or any other agency is making transfers to school students in the digital currency for buying books, it will be used only in bookshops. Depending on the design, if the money remains unused for a given period, it can return to the sender’s account. This will ensure that the money is spent in the desired manner. It will also reduce the risk of fraud. Such functions can also be used by private firms to meet specified expenditures like fuel costs and business travel expenses of employees. Aside from the use in retail segments, improved functions can also increase adoption in financial markets. The other important aspect touched upon in the RBI statement was regarding the offline usability of CBDC. It will enable transactions in areas with poor or limited internet connectivity.

If properly implemented, both these functions can improve the spending efficiency of the government and enhance citizens’ welfare. It is often debated whether the government should provide price subsidies or do cash transfers. The recent experience in India suggests that cash transfers are more efficient. Programmability in the digital currency will further tilt the balance in favour of cash transfers with a fair amount of certainty that the money will be used for the intended purpose. It is also worth noting here that programmability will not end fungibility. As explained by RBI officials at a recent press conference, fungibility will be on hold only for a limited period, which will allow it to fulfil the purpose.

Given the digital infrastructure India has created over the past few years, particularly in the area of payments, the possibility of using the CBDC could be fairly substantial. To be sure, implementing such programmes on scale will take time. Often the financially excluded are also digitally excluded. The use of the CBDC requires basic digital literacy and access to a mobile phone. However, since the CBDC is still in the pilot stage, the experience of extending usage and functioning will inform the RBI to make necessary changes before it is issued at an increased scale. The experience of the RBI will also be carefully watched by other large central banks that are studying the possible issuance of CBDCs.