With no existing global precedent, no country has fully initiated using Central Bank-backed Digital Currency. However, many are in developmental or trial stages[1]. In India, a phased implementation has begun, distinct for retail and wholesale distribution of Digital Rupee. After the ban on dealing with privately backed cryptocurrencies, the Reserve Bank released a concept note[2] in October 2022, delving into a 360-degree approach to launch and manage the flow of the new form of Decentralised Finance. Within a month, circulars were issued for the Operationalisation of Central Bank Digital Currency (CBDC), in Wholesale[3] and Retail[4] respectively. In the latest announcement, the Central Bank, to increase the accessibility to a broader section of people has allowed transactions of Retail CBDCs through non-bank PSOs. Payment System Operators originally were the Clearing Corporation of India Limited (CCIL) and the National Payment Corporation of India (NPCI).
The upsurge in the global cryptocurrency market and the coronavirus pandemic led a considerable population to shift to online payment methods. The share for only retail digital payment transactions was 1050 crores, amounting to the value of 51 lakhs crore in January 2023[5]. This phase also saw a fresh market for penetration in the FinTech sector as the Central Bank allowed and aided various categories of institutions to operate in different capacities and authorised as needed. Some included Non-Banking Financial Companies, Payment Gateways, Payment Aggregators, Merchants and other Intermediaries, which were third-party payment services, and not necessarily bank-backed.
These new regulations allowing retail CBDC through non-bank PSOs have concocted a space for eligible PSOs to enter into such a market and expand their scope of business. However, the anticipated rise in Retail CBDC provision by these operators is poised to escalate compliance burdens and costs. Increased costs may necessitate adjustments to pricing structures or business models to maintain profitability. These payment operators will enable Digital Rupee transactions by setting up a Digital Rupee Wallet for users, facilitating transactions as regulated by the RBI and NPCI. As non-bank PSOs are integrated into the distribution process, the adoption of CBDC has a larger scope to expand, reminiscent of the regulators' move in 2016 with Unified Payments Interface (UPI) Payments. This action has broadened the playing field to elevate CBDC into a mainstream payment option, particularly since only Central Bank-backed digital currency is permitted for transactions.
[1] PwC Report - Central bank digital currency in the Indian context, September 2021, https://www.pwc.in/assets/pdfs/consulting/financial-services/fintech/point-of-view/pov-downloads/central-bank-digital-currency-in-the-indian-context.pdf
[2] ‘Issuance of Concept Note on Central Bank Digital Currency’, RBI Press Release: 2022-2023/1012, 7 October 2022
[3] ‘Operationalisation of Central Bank Digital Currency-Wholesale (e₹-W) Pilot’, RBI Press Release: 2022-2023/1118, 31 October 2022
[4] ‘Operationalisation of Central Bank Digital Currency – Retail (e₹-R) Pilot’, RBI Press Release: 2022-2023/1275, 29 November 2022
[5] Shaktikanta Das: Payment System Operators - Governor of the Reserve Bank of India, at Payment System Operators (PSO) conference, Kochi, 18 March 2023; https://www.bis.org/review/r230405g.htm