e-Rupi: A revolution or a failure in the making?

Ever since the Crypto Boom of 2017, there has been a heated debate on the use of cryptocurrency and related technologies like blockchain in formal payment systems. Although countries have been taking active steps to restrict the rise of cryptocurrency transactions within their economies as a measure to maintain control, as the benefits of technologies like blockchain and digital currency are becoming apparent, central governments and the central banks across the globe have started looking into the prospects of launching their own variant of digital currency, termed as Central Bank Digital Currency (CBDCs) in their economies. Not one to be left behind. India has also stepped foot into this race of introducing CBDCs.

India's history with digital transactions

India has proven itself as a model nation in terms of digital transactions with the massively successful UPI payment system. Digital transaction volume as well as value, exclusively through UPI, has nearly doubled from 2022 to 2023. 

As can be seen in the graph above, both the value and volume of transactions on UPI, has soared in India. This has established India as one of the most successful countries in regards to adoption of digital payments. UPI has even gained international popularity with foreign nations like UAE, France, Nepal, Bhutan and others adopting the payment service. 

With such a successful background in the digital payment's ecosystem, there are high expectations of India with regards to the implementation of CBDCs. 

An overview of CBDCs

Before we move forward to discuss India's implementation of the CBDC system, an overview of CBDCs must be done.

Central Bank Digital Currencies (CBDCs) are a form of digital currency issued by a country's central bank. CBDCs take inspiration from cryptocurrencies, but sport a key difference in that their value is fixed by the central bank, equivalent to the country's fiat currency, instead of being determined by the free market. CBDCs differ from a country's fiat currency in that it is not pegged to any physical commodity like gold.

As Central Banks across the globe are taking their shots at this rising financial instrument, presenting their own takes on how CBDCs should be implemented. At present there are 3 major operational models for CBDCs. The first model is an account-based model wherein the consumers hold deposit accounts directly with the central bank. The second model, in stark contrast to the account based model, is the Chinese e-CNY CBDC which relies on private-sector banks to distribute and maintain digital-currency accounts for their customers. The third model is one which is under consideration by the European Central Bank, wherein licensed financial institutions each operate a permissioned node of the blockchain network as a conduit for the distribution of a digital euro. India has adopted the account-based model in the implementation of its CBDC.

India's take at CBDC: The e-Rupi

With the pilot launch of India's e-Rupi, there has been a big debate discussing if this was the correct move for India, considering India's existing dominance in the digital transaction ecosystem. This debate arises because the difference between e-Rupi and digital payment systems like UPI are not visible. While both systems are completely different, to the end user both seem as a way to transact digitally. Thus, it is important to lay down the differences between the two platforms.

1. The main difference between e-Rupi and UPI is that while e-Rupi is a digital currency itself, UPI is just a platform that facilitates digital transactions.
2. In UPI transactions, the banks of the payee and the payer act as intermediaries. Thus, in this process, the bank account of the payer is debited and the money is transferred to the bank account of the payee. This amount can be withdrawn by the payee, in the form of physical money. On the other hand, in e-Rupi, money is drawn from the bank account and stored in the wallet of the user. When the payment is done, the money (or digital token) is transferred to the wallet of the payee, without the involvement of the bank. The payee cannot withdraw this money as physical cash.
3. e-Rupi functions more like physical cash, as in you can withdraw money from your bank account to your wallet and spend it from the wallet. Whereas, in UPI the money is transferred from the bank account of the payer to the bank account of the payee.
4. Unlike UPI, where debit or credit cards can be used to make payments, e-Rupi only uses the money that has been drawn into the user's wallet.
5. Since e-Rupi is directly operated by the RBI, and unlike UPI does not involve individual handlers, the payments are more secure, fast and direct.
6. In e-Rupi some degree of anonymity is maintained as banks are not able to collect transaction data unlike UPI because there are no intermediaries.

As we can see, the e-Rupi is very different from UPI transactions in almost every way. Because of these differences, e-Rupi holds an advantage over UPI in the fact that it does not require the involvement of intermediaries to operate. In UPI, banks facilitate the transaction process, thus there is an intrinsic facilitation cost attached to every transaction. Currently the government is subsidising these costs but it is not possible to continue this indefinitely considering the rapid pace at which UPI transactions are growing in India. However, as e-Rupi is directly operated by the RBI and does not involve any intermediary bank to facilitate the transactions, it holds an inherent cost advantage over UPI.  

In addition, e-Rupi is more secure as well as more stable as compared to UPI for the very same reason. The lack of intermediaries reduces the possible points of failure or breaches in the system making it inherently more secure. 

e-Rupi also brings with it the advantages of the blockchain technology. For every e-Rupi transaction, the funds are immediately transferred and the transaction is immediately recorded in the common ledger, thus removing the need for any settlement process. This also makes it much easier for the government to provide and track the disbursement of social benefits like subsidies.

Although e-Rupi holds many advantages over common digital transaction methods, it also has some disadvantages. For one, since e-Rupi is solely handled by the RBI, any downtime as a result of technical or other reasons can create widespread disruption and chaos. 

e-Rupi: A revolution or a failure in the making?

After analysing the differences between the e-Rupi and other digital payment systems like UPI, it is clear that e-Rupi holds a clear advantage over these systems and thus holds clear potential to bring about a revolution in the Indian digital transaction ecosystem. However, the success of e-Rupi largely depends on how it is implemented. The pilot project for e-Rupi has brought to light many issues that have to be ironed out of the system before it can be launched out to the public. The success of e-Rupi relies heavily on the ability of the RBI to deliver a seamless experience to e-Rupi users. Any sort of disruption or issue can create big problems as e-Rupi is going to be a centralised system. Thus, the RBI and the government cannot afford to make any errors in the operation of the e-Rupi system.