On December 1, the Reserve Bank of India launched its first retail digital rupee pilot program with a closed user group. Initially, it involves the four state banks (State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank) providing smartphone wallets to enable access.

The first video demonstrations of the central bank digital currency (CBDC) show the previously announced use of tokens with the same denominations as physical cash. The wallet address is associated with both the phone’s SIM card and a bank account.

However, instead of using a bank account, the mobile app offers the option to use Indian Aadhar’s identity and then top up using the UPI payment method. There is also the option to create a ‘basic’ wallet without providing an identity. Like other central banks, any wallet that is not linked to an identity will likely have transaction limits.

The challenge of consumer adoption

For countries with advanced payment systems like India, a key CBDC challenge will be consumer adoption. Many of the people who are likely to use the eRupee wallet already use UPI for digital payments, which acts like a virtual debit card. Therefore, it is not surprising that we have already seen several comments on social media where people wonder why they would use a CBDC instead of a UPI.

This goes back to the motivations behind the digital rupee. The main stated drivers are to reduce the costs of distributing physical cash and for financial inclusion. While that is the central bank’s agenda, it may not match the motivations of consumers. People prefer to pay cash for a variety of reasons. It may be out of habit and convenience, or because they don’t have a smartphone or internet access, or because they want to avoid having transactions monitored. The app may not address these issues in these early stages.

Financial inclusion could be a more important factor. For example, in India, ration cards are used to help the poor buy basic foodstuffs. A digital rupee could replace ration cards with the use of money restricted to spending on food. But if a person needs a ration card, he may not be able to afford a phone. However, the central bank has plans for secure offline CBDC payments, which could include smart cards. A mobile wallet could be used for agricultural payments, with spending restricted to agricultural inputs.

One of the key benefits of a digital rupee is boosting the digital economy. It could offer consumer benefits above UPI by combining a CBDC with programmable features, automation, and smart contracts that will appeal to tech-savvy early adopters.

For just one month, India has implemented both a wholesale and retail CBDC pilot. The speed at which India has come this far is quite impressive.