BCG UK’s MD and partner Kunal Jhanji says while retail CBDC has received attention, more thought needs to be devoted to wholesale CBDC, how it will be operated and the kinds of transactions that it can support
The Reserve Bank of India (RBI) launched the Central Bank Digital Currency (CBDC) or e-rupee on December 1, 2022. The e-rupee, which is a digital version of the Indian rupee, is issued as a tokenised digital currency. However, nearly two years after its launch, there are only a little over five million users and 16 participating banks that have taken part in the CBDC pilot projects.
Though RBI Governor Shaktikanta Das has confirmed that there is “no rush” for a full-scale launch, the acceptance and circulation of CBDC in the wholesale sector is minimal. In the retail sector, however, CBDC has gained some traction.
Data from the RBI shows that in the wholesale segment, the outstanding amount of CBDC in circulation stood at Rs 8 lakh in March 2024, down from Rs 10.6 crore last year, while in the retail segment, the amount surged to Rs 234 crore in March 2024, up from Rs 6 crore last year.
In an exclusive interaction with Outlook Business, Kunal Jhanji, managing director and partner at Boston Consulting Group (BCG) UK, spoke about the challenges that need to be addressed for better adoption of CBDC in the retail and wholesale spaces.
It has been nearly two years since the launch of CBDC in India, but the RBI’s pilot initiative for the digital Rupee has yet to gain traction. What, according to you, is the main challenge for CBDC to gain mass acceptance?
I guess, firstly, this is a pilot phase of the project by the RBI and they have been controlling it, so they can clearly understand the adoption on the merchant side; that is incredibly important. They want to understand the pain points, what consumer education is, whether they [users] understand the difference between fiat currency and CBDC. The reason there is a pilot is ultimately when CBDC rolls out on scale, there is success.
Every single central bank in the world that we work with is looking at exactly a similar kind of roll out, either on a smaller scale or a pilot, similar to what India has achieved. Frankly, this is a fantastic way to test learn what the future for the design of CBDC needs to be.
Financial stability needs to be maintained for the banks and the existing ecosystem that has been created in the last few years. And you cannot jeopardise that stability through a significantly faster roll out of an instrument that has been completely untested in the past.
The RBI proposed allowing non-bank payment companies to have a CBDC wallet. However, NBFCs and fintechs have recently been under the radar of the RBI. What precautionary measures should they implement before entering the CBDC wallet business to avoid a backlash from RBI?
In my mind, these are two parallels. [There are] the usual business activities around regulations and on compliances for these NBFCs, fintechs and BSPs [business service providers]; those have to carry on as it is.
For participation in the pilot, fintechs and NBFCs have got a pretty clear set of guidelines to work with. It could be around the onboarding of consumers, the onboarding of merchants, transparency around KYC [know your customer] and the compliances they need to follow.
So, to some extent, it is a good opportunity for fintech to understand what the RBI wants and is looking for when it comes to how to play in the market and the ecosystem, from the regulatory compliance standpoint or the way they would like to innovate by maintaining the level of stability.
Because ultimately, if there are standardised KYC and AML [anti-money laundering] processes for a large organisation, or a maturing or developing organisation, those processes need to be identified. Standardisation of these processes is incredibly important, not just for maintaining the stability of the regulatory environment but also to ensure that customers have a standardised uniform experience, whichever entity they work with in the market.
The acceptance of wholesale CBDC has been extremely low. Why do you think this has been the case?
I think a lot more thought needs to be put into the wholesale CBDC design, how they [the RBI] want to run it, what kind of transactions can happen, why the transactions need to be done. A lot more thinking around the market needs to be done on that.
RBI has already admitted to some extent the development that needs to be done in the thought process. And a lot more attention has been on the retail side to understand and convey to the market the benefits CBDC can bring in the consumer space. That has taken more energy and we think there is more importance that needs to be given to wholesale CBDC.
Do you think there is a need for any regulatory and policy changes to enhance the acceptability of CBDC? What are some regulatory changes that can be implemented?
In my mind, I think that consumer education and merchant education are going to be incredibly important to enable the level of adoption. I think they [RBI] have been very active in terms of communication.
The governor just had a market interaction on this a few days ago, where he talked about some of the innovations and functionalities that CBDCs would bring to some segments of consumers. How programmable money can benefit some of the farmer segments or other parts of the merchant space through which they can continue to benefit from the level of innovations.
I do think that continued education on digital payments on the consumer side is incredibly important. Similarly, on the merchant end, the adoption and the acceptance of any form of digital payments, let alone CBDC, is also very important. We know the merchant side needs a bit more adoption than the consumer side for digital payments to continue to flourish.
I think that sort of education agenda more than regulatory change is going to be important to see success in the CBDC space or broadly enhancing the digital payment ecosystem that India has created.
Deposit insurers that provide insurance to depositor funds against bank failures should take an interest in the degree of replacement of bank deposits by CBDCs, according to RBI. Do you think CBDC can attract deposit insurers too?
I think it will increase competition in the market. It is no secret that the banks will have to be a bit more competitive in attracting consumer deposits and have a level of competition from the CBDC. That will have implications for the cost of funds and ultimately have an implication for the cost of credit in the market.
But ultimately, consumers can benefit on the deposit side with well-balanced, well-maintained financial stability in the banking side. More competition to innovation is always helpful. Consumers ultimately could benefit, but it needs continuous monitoring.