India’s central bank digital currency (CBDC), the e-rupee, is facing a sharp decline in activity following the cessation of efforts by local banks to artificially boost its usage metrics, according to a recent Reuters report. Launched in December 2022 by the Reserve Bank of India (RBI) as a digital alternative to physical cash, the e-rupee initially saw promising adoption rates, hitting a milestone of 1 million retail transactions per day by the end of 2023. However, sources reveal that this surge was largely driven by banks incentivizing retail users and partially paying employees in e-rupees. Now, with these incentives removed, daily transactions have plummeted to around 100,000.

The Rise and Fall of e-Rupee Transactions

The RBI's e-rupee pilot program was launched with high expectations, aiming to revolutionize the way Indians handle money. The digital currency was seen as a step towards a cashless society, offering a secure and efficient alternative to physical cash. By December 2023, the initiative had reached its ambitious target of 1 million retail transactions per day. However, this achievement was not entirely organic.

Artificial Boosts and Incentives

According to Reuters, the impressive transaction numbers were largely a result of banks being directed to boost e-rupee usage. Banks offered various incentives to retail users, such as discounts and cashback, and even paid a portion of their employees' salaries in e-rupees. These measures were implemented to test the system's scalability and resilience. However, once these incentives were withdrawn, the daily transaction numbers dropped significantly, falling to about 100,000.

Shift in Focus

With the end of the artificial boost, the RBI has shifted its focus. According to sources, the central bank is not planning an immediate expansion of the pilot program. Instead, the emphasis is now on further testing the technology and developing practical applications for the digital currency. One source mentioned, "Adoption is expected to grow as more use cases are established."

Global Trends in CBDC Development

The decline in e-rupee usage comes amid broader global trends in CBDC development. Earlier in June, the Bank for International Settlements (BIS) revealed that most central banks globally are unlikely to issue retail versions of CBDCs soon. Only 12% of respondents in a BIS survey indicated plans to launch retail CBDCs in the near future.

Wholesale CBDCs on the Rise

The BIS survey suggested that the likelihood of launching a wholesale CBDC within the next six years now exceeds that of a retail version. It predicts that up to nine wholesale CBDCs could be in public circulation by the end of the decade. Central banks are primarily interested in wholesale CBDCs to enhance cross-border payments and enable financial institutions to access new functionalities made possible by tokenization, such as composability and programmability.

The Future of e-Rupee

Despite the current decline in usage, the future of the e-rupee is not bleak. The RBI is committed to further testing and developing the digital currency. As more practical applications and use cases are established, adoption is expected to grow. The central bank's focus is now on ensuring the technology's robustness and exploring its potential benefits.

Potential Benefits of e-Rupee

The e-rupee offers several potential benefits, including:

1. Enhanced Security: Digital currencies can offer higher security compared to physical cash, reducing the risk of theft and counterfeiting.
2. Efficiency: Digital transactions can be faster and more efficient, reducing the need for physical cash handling and processing.
3. Financial Inclusion: Digital currencies can help bring more people into the financial system, especially those in remote or underserved areas.
4. Cost Savings: Reducing the reliance on physical cash can lead to significant cost savings for both the government and businesses.

Challenges and Considerations

While the potential benefits are significant, there are also several challenges and considerations that need to be addressed:

1. Technology Infrastructure: Ensuring robust and secure technology infrastructure is crucial for the success of digital currencies.
2. User Adoption: Encouraging widespread adoption among users requires building trust and providing incentives.
3. Regulatory Framework: Establishing a clear regulatory framework is essential to address legal and compliance issues.
4. Privacy Concerns: Balancing the need for transparency with privacy concerns is a critical consideration for digital currencies.

Conclusion

The decline in e-rupee usage following the end of artificial boosts highlights the challenges of achieving widespread adoption of digital currencies. However, the RBI's commitment to further testing and developing the e-rupee, along with the broader global trends in CBDC development, indicates a promising future for digital currencies. As more practical applications and use cases are established, the e-rupee is expected to see increased adoption, offering significant benefits in terms of security, efficiency, financial inclusion, and cost savings.

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