Is RBI’s push for instant payments hindering CBDC adoption?

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It’s been over two years since the Reserve Bank of India (RBI) introduced India’s blockchain-based digital rupee. But even after two years of trials, India’s retail central bank digital currency (CBDC) struggles to find strong adoption in the country’s burgeoning digital payment landscape.

This is primarily because RBI has been simultaneously pushing to popularize India’s flagship Unified Payments Interface (UPI), a global success story and an example of effective Digital Public Infrastructure (DPI). 

“In India, the digital rupee pilot has yet to achieve mainstream adoption among India’s vast population, especially in the presence of the widely adopted Unified Payments Interface (UPI). As of May 2024, the e-rupee in circulation stood at 3.23 billion rupees, up from 1 billion rupees in December 2023. However, this remains a small fraction of the 35.4 trillion rupees in banknotes currently in circulation,” stated an International Monetary Fund (IMF) report.

While the RBI believes CBDC is the future of money, it is also focused on leveraging the benefits of new technologies.

The central bank had successfully reached one million daily transactions for its retail CBDC pilot by December 2023, after banks were told to offer incentives to users and a portion of bank employees’ salaries were paid using the e-rupee. However, daily transactions for retail CBDC fell to about 100,000, data gathered by a Reuters report in June showed, quoting sources it did not identify.

“The popularity of instant payment systems like UPI poses a challenge to the retail adoption of the e-rupee,” said Rohan Sharan, founder and chief executive of Timechain Labs, an on-chain application development firm utilizing BSV blockchain technology. 

“The ease, speed, and zero-cost nature of UPI transactions mean the e-rupee must offer unique advantages such as offline payments, programmable features, or enhanced security to attract users. Without clear incentives, CBDC’s retail adoption could continue to struggle. The RBI might need to create specific use cases where CBDCs provide tangible benefits over UPI,” Sharan told CoinGeek.

RBI started its first digital rupee pilot in the wholesale segment on November 1, 2022, to settle secondary market transactions in government securities. It started the pilot with nine banks—State Bank of India (NASDAQ: SBKFF), Bank of Baroda, Union Bank of India, HDFC Bank (NASDAQ: HDB), ICICI Bank (NASDAQ: IBN), Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC (NASDAQ: HSBC). 

The retail digital rupee pilot started on December 1, 2022, and users were able to transact through a digital wallet offered by the participating banks and stored on mobile phones or devices.

In March 2024, former RBI Governor Shaktikanta Das said that India had about 4.3 million retail CBDC users, while an additional 400,000 merchants were also using the e-rupee.

“While the number of [CBDC] transactions have reached a high of 1 million a day, we still see preference for UPI among the retail users. We, of course, hope that this will change going forward,” Das said in May.

“We have leveraged the existing merchant infrastructure on the UPI to facilitate CBDC transactions. We have also enabled interoperability of CBDC with UPI,” Das added.

Not just India

To be fair, adoption of CBDCs remains slow in most regions, not only in India, despite several countries launching or piloting them. 

The Bahamas, Jamaica, and Nigeria have launched nationwide CBDCs, while China, the Eastern Caribbean Currency Union (ECCU), and India have initiated large-scale pilots, according to the IMF report.

In the Bahamas, the adoption of the Sand Dollar is hindered by low merchant participation and limited integration with the banking system. The ECCU’s DCash faced similar issues, including poor user education and a lack of merchant network development. 

Jamaica’s JAM-DEX struggled with low adoption due to insufficient public education and merchant onboarding challenges. Nigeria’s eNaira adoption has been slow, with 98.5% of wallets remaining unused a year after launch, partly due to restricted access and limited domestic usage.

China’s e-CNY, the largest CBDC pilot, has seen widespread use in various sectors, with 120 million wallets and 16.5 billion yuan in circulation by June 2023. However, it still represents only a small fraction of China’s total money supply and lags behind private payment apps like AliPay and WeChat Pay, the IMF report stated. 

UPI sees 10-fold growth while e-rupee struggles

While India struggles to raise public support for its e-rupee, UPI has seen a tenfold increase in volume over the past four years, from 12.5 billion transactions in 2019-2020 to 131 billion transactions in 2023-2024, or 80% of all digital payment volumes.

In October 2024, UPI processed 16.58 billion transactions, marking a 45% increase compared to October 2023. Introduced in 2016, UPI offers instant money transfers and is a single mobile application for accessing different bank accounts.

“With its unmatched convenience and familiarity, UPI may overshadow CBDC in retail adoption. Many users may resist transitioning to a new payment method,” pointed out Amit Kumar Gupta, a legal practitioner at the Supreme Court of India. 

“Public awareness initiatives could highlight CBDC’s unique benefits, such as offline capabilities. Distinct advantages over UPI could help CBDC carve a niche,” Gupta pointed out.

According to Sharat Chandra, founder of EmpowerEdge Ventures and a startup enabler, the RBI’s push for instant payment systems like UPI may indeed hinder the retail adoption of CBDCs.

“As users become accustomed to seamless transactions through UPI, they may be less inclined to adopt a new digital currency unless it offers distinct advantages. Current data indicates a decline in CBDC retail usage, suggesting that without compelling incentives or unique features, widespread acceptance may remain elusive,” Chandra told CoinGeek.

Overlapping functions

The RBI’s focus on real-time payment systems like UPI and the e-rupee could create user confusion and a conundrum. UPI’s existing infrastructure and user base makes it a powerful competitor for CBDCs, leading to potential overlapping functions between UPI and CBDCs, particularly for small, everyday transactions, pointed out Raj Kapoor, founder of India Blockchain Alliance (IBA).

“Given UPI’s convenience, no-fee model, and wide acceptance among merchants, it may reduce the immediate need for CBDCs in retail payments. Users may not see enough incremental benefits from CBDCs, as UPI already offers real-time, near-instantaneous transfers,” Kapoor told CoinGeek.

Another issue with CBDC adoption is that while CBDCs offer distinct features like programmable money and secure digital assets, they require extensive public awareness and onboarding.

“UPI’s rapid and frictionless usage could delay CBDC adoption, as it would take considerable effort to convince users to transition to an entirely new payment system. Further, integrating CBDCs into India’s regulatory framework might face hurdles and may not necessarily be seamless. While UPI’s government backing provides a seamless user experience, CBDCs will require additional legal considerations and infrastructure to ensure smooth integration across various platforms, which could slow adoption,” Kapoor added. 

RBI’s efforts 

India’s central bank announced plans to make its e-rupee accessible to more retail users by including non-bank payment system operators to offer CBDC wallets. The move is expected to test how resilient India’s CBDC platform is in handling multi-channel transactions.

Among other initiatives, the RBI said it is exploring the possibility of using the e-rupee in commercial papers (CPs) and certificates of deposits (CDs) on a trial basis. CPs are short-term debt instruments issued by companies to raise funds, while CDs are fixed-income investment instruments that can be taken out by investors from financial institutions and commercial banks.

The RBI also said it is looking to enable additional functionalities of programmability and offline capability in CBDC retail payments. While programmability is expected to facilitate transactions for specific and targeted purposes, offline functionality will allow transactions in areas with poor or limited internet connectivity.

The central bank also started discussions with the Hong Kong Monetary Authority (HKMA), the United States Federal Reserve, and the international payment platform SWIFT to explore cross-border payments for CBDCs. The RBI said it is looking to introduce the digital rupee in the call money market and plans to use CBDCs as tokens for call money settlement.

Miles to go

“The interoperability of CBDC with UPI would be a step in the right direction; however, it still faces obstacles such as limited merchant acceptance and lack of widespread awareness. Additionally, CBDC wallets are not yet available through non-bank payment operators like PhonePe or Google Pay, which limits accessibility,” Kapoor pointed out. 

The lack of compelling incentives to switch to CBDC over existing payment systems like UPI or bank transfers also hampers adoption. While the government is pushing for a broader rollout and has even considered integrating CBDC into offline payment solutions, it still faces competition from more user-friendly, fast, and widely accepted systems.

“2025 would need to come up with more aggressive awareness campaigns, wider distribution methods, and stronger incentives will be necessary to compete with UPI’s entrenched position in the market. However, without significant improvements in the CBDC ecosystem, its retail adoption might continue to struggle,” Kapoor added.

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