CBDCs are on the march. From China to the UAE, from the Bahamas to Nigeria, countries around the world have begun experimenting with the use of central bank digital currencies to transform their national fiat currencies into digital mediums of exchange. One of the driving factors behind these state-backed digital currencies is the sharp decline in the use of physical cash, which is expected to fall by around a third in Europe between 2014 and 2021, according to McKinsey. The power of digital payments is so strong, extreme, that they can be redeemed through public cash issued by central banks. As the popularity of physical money declines, this relationship may break. As these payment systems become increasingly global, central banks are eager to introduce CBDCs to reassert their role as anchors of capital.
That was the reason why the Reserve Bank of India (RBI) officially started testing its CBDC, the e-rupee, last week. The product of the central bank’s two-year study, the RBI explained in a concept note published in October that the project will “strengthen India’s digital economy, increase financial inclusion and make money and payment systems more efficient.” Supported by State Bank of India, ICICI Bank, Yes Bank and IDC First Bank, the pilot will be conducted at selected locations and clusters across the country through the digital wallet offered by these institutions. There’s just one problem: the actual popularity of CBDCs in other democracies remains incredibly low.
Take Nigeria. It launched its own CBDC, e-Naira, in October 2021. Since then, adoption has been poor. Ten months after the launch of E-Naira, the governor of the Central Bank of Nigeria admitted that the digital currency had recorded only 200,000 transactions worth a total of $9.5 million. This is in stark contrast to the estimated value of cryptocurrency transactions in the country between July 2021 and June 2022, which is estimated to be around $20 billion, according to Chainalysis. Adesoji Solanke, director of investment bank Renaissance Capital, said e-Naira was also highly hoped for to address the currency shortage, but it currently “doesn’t address any of these key use cases”. As of May this year, only 80 retailers have registered with the country’s CBDC, with a total of 500,000 downloads for the e-Naira app last week – equivalent to just 0.25% of Nigeria’s population.
A similar pattern occurred in the Caribbean, home to the Bahamian Sand Dollar, Jamaica’s JAM-DEX, and DCash, which is used on eight islands off the region’s east coast. While the national debate over the adoption of CBDCs in Nigeria has been dominated by the government’s hostility to cryptocurrencies, the conversation among these island nations has been defined by how they can improve financial inclusion: About 17% of Jamaicans and 18% of Bahamians, for example, remain unbanked . However, only 3.4% of ex-citizens have downloaded the Lynk app, while the figure is even lower for DCash and Sand Dollar downloads.
Its potential audience may be frustrated by the many technical glitches affecting CBDCs in the region. On-boarding merchants in Jamaica, for example, proved embarrassingly difficult, with DCash going offline for two months earlier in the year after the certificate for the network that owns the CBDC distributed ledger expired. Additionally, while the IMF praised the digital currency for its potential to promote financial inclusion, it encouraged the Bahamian government to “accelerate education campaigns and strengthen domestic capacity, including cyber security, and maintain oversight of the CBDC project to protect financial integrity.”
Indeed, the only case of CBDC that has outperformed and outperformed expectations has been the digital yuan. The People’s Bank of China, also known as e-CNY, began testing the digital currency in September 2021. Since then, transactions using CBDC have surpassed $13.9 billion, which some attribute to its introduction into the digital payments economy. it has almost caught up to those using cash and places where cryptocurrencies are heavily suppressed. Active promotion by the central government hasn’t hurt either — a campaign that ostensibly touts the role the digital yuan could play in reducing systemic risk in the national payment system, while some have speculated that it provides another opportunity for cash. including state individual individual transactions.
India is a completely different situation. Here, the national conversation about the launch of the digital rupee was fueled by the government’s hostile attitude towards cryptocurrencies, their threat to the stability of the country’s financial system and their widespread use in financial fraud. For example, earlier this year, BitConnect founder Satish Kumbhani was charged by the US Department of Justice with “running a global Ponzi scheme” by defrauding investors out of $2.4 billion. So the Indian government has tried to use all the powers at its disposal to crush cryptocurrency by imposing a 30% tax on cryptocurrency trading income (an outright legal ban was overturned by the Supreme Court in 2018.) Despite this, India remains a global leader in cryptocurrency adoption, according to Chainalysis , and trades around $172 billion in BTC, ETH, and other coins in the year to June 2022.
Part of the reason for such high usage is the significant market for remittances within India, which the World Bank estimates is worth $100 billion this year. More Indian expatriates are now turning to cryptocurrency for cross-border payments, eschewing established financial institutions that take a large chunk of each transaction. The digital rupee, its advocates hope, can offer consumers a government-backed alternative without the collateral of scams, outages and extreme market volatility. However, researchers from PwC recently argued that CBDC could theoretically facilitate faster remittance payments, which could only happen if other major economies cooperated on the necessary infrastructure.
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For now, the Indian government is taking a cautious stance on the rollout of the digital rupee, initially limiting the pilot program to “regulating secondary market transactions in government securities.” The reception in India’s banking sector has been lukewarm, financiers say Reuters conducting such transactions using digital rupee is inefficient compared to traditional methods. “I don’t think banks will want to use it once the pilot is over without any RBI pressure,” said a private banker. If the global record of CBDCs is anything to go by, neither will Indian consumers.
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