A high-five to ‘Digital Rupee’

Reserve Bank of India is on the verge of launching Digital Rupee – its version of the Central Bank Digital Currency. Last month, it released a note titled “Concept Note on Central Bank Digital Currency (CBDC)”. It must be said that the initiative is timely, well-calibrated and well-conceived, and intends to complement rather than replace the existing financial system.

What are Central Bank Digital Currencies and how do they differ from crypto currencies? Well, in simplest terms, a CBDC is just a digital form of currency, in lieu of paper currency, issued by a central bank. The digital currency issued by a central bank like the RBI is not crypto currency, because unlike crypto currencies which are decentralised and un-regulated by any single authority, the digital currency is under the supervision and control of the central bank.

The rapid and impressive developments in our digital payment and settlement systems in recent years provide India an ideal platform to take the next logical step, namely, the Digital Rupee. Today, at least in urban and semi-urban India, it is possible to move around, shop and travel anywhere using merely one’s phone, carrying no cash, as long as one has a bank account linked to UPI. One can pay one’s household staff, the ubiquitous thelawala, the auto-rickshaw driver, the plumber, the electrician, practically from one’s fingertips. One need not fumble in one’s wallet while crossing most toll plazas. One can also pay one’s bills for utilities or transfer money from one’s bank account to another in seconds. None of these was possible until about 10 years ago. One hardly needs a debit card, at least for payments. Even the need to withdraw cash using the card has been practically minimised. Personally, I do not recall when I visited an ATM last.

As the concept note rightly points out, this has been possible thanks to the creation of RTGS (Real-Time Gross Settlement) and NEFT (National Electronic Funds Transfer) – both being 24x7, real-time or near real-time fund transfer systems. These, alongside the introduction of IMPS (Immediate Payment Service) and UPI (Unified Payments Interface) for instant payment settlement, and mobile-based payment systems such as BBPS (Bharat Bill Payment System), BHIM (Bharat Interface for Money) and NETC (National Electronic Toll Collection) etc., to facilitate electronic toll payments, have transformed the payments ecosystem of India, making it one of the most technologically smart financial systems in the world.

And the RBI rightly needs to be congratulated on a job well done in this respect.

The CBDC initiative has come in the wake of various crypto currencies which have made erratic waves in the recent past. These private crypto currencies are neither commodities nor claims on commodities, and thus of no intrinsic value. They beg the very meaning of what money supposedly represents, namely, a medium of exchange (like buying a cup of coffee for Rs 80); a unit of account (like a value indicator for all kinds of goods and services); and a store of value (saving or storing for future). Surely, none of these is possible when the value of a currency fluctuates wildly every day, as we saw in the case of Bitcoin in recent times?

True, the innovation of blockchain technology has been an important by-product of private crypto currencies. But blockchain technology can easily be used outside of crypto currencies and applied in myriad other applications (though the RBI’s Note is silent on this aspect in its discussions on the design of the Digital Rupee). The Concept Note rightly observes that with excessive anonymity and de-centralisation, private crypto currencies are bound to bypass the established and regulated intermediation and controls and endanger the integrity and stability of our monetary and financial ecosystem.

It may be recalled that there were three underlying objectives forwarded as the reasons for the November 8, 2016 Demonetisation, namely, controlling money laundering (controlling black money), fake currency and terror financing. Today is the sixth anniversary of Demonetisation. None of these objectives were achieved or are even achievable by Demonetisation, either in theory, or in practice.

Interestingly, however, the introduction of the Digital Rupee may well go a long way towards helping achieve these objectives to a significant degree, apart from reducing the operational costs of issuing and managing physical currencies and cross-border transactions, promoting financial inclusion, and bringing about greater efficiencies, resilience and innovation in our financial system.

In short, the introduction of the Digital Rupee will certainly provide the Indian public most of the benefits of virtual currencies without the negative social and economic fallouts that private virtual currencies may entail.

But what does the Digital Rupee mean for common folks like you and me in terms of any change in our day-to-day experience? The happy news is, ‘absolutely nothing.’ For most of us, it would be business as usual. Except with the advantage that one would also be able to do transactions even in the absence of wi-fi or phone connectivity.

I have two key concerns vis-à-vis the Concept Note. Firstly, it says little about the application of blockchain technology even in its discussion on wholesale application in the digital currency design. Blockchain is a system of recording information such that it is difficult or nearly impossible to change, hack, or cheat the system. Especially in the context of bank credit, with our high NPAs and many a debtor decamping overseas with thousands of crores, one wonders why blockchain technology, which could track such transactions assiduously, is prominently absent.

The other concern, more nuanced, relates to the Digital Rupee’s design, as to whether it should be more akin to an interest-bearing deposit (store of value) or non-interest-bearing cash-equivalent (medium of exchange). For some inexplicable reason, the Note observes that creating a “Deposit-like” digital currency would result in loss of deposits by banks, impeding their credit off-take. One fails to understand why banking credit cannot be integrated with “deposit-like” digital currency, given the available technology.

That said, there is no question that the Digital Rupee is bound to strengthen India’s digital economy further and make our financial system among the best in the world.

(The writer is an academic, author and a former banker)