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Description: Discover India's digital currency revolution with Erupee, RBI's Central Bank Digital Currency (CBDC), set to redefine payments and financial inclusion 

Digital Rupee

Today, countries are seized with the idea of cryptocurrency as in this modern digital age, paper banknotes are gradually losing their role as a reference value in payment systems across the world. Digitisation of payments cannot be ignored by the countries and therefore, it has become pertinent for Central Banks to consider new technologies in payments in order to ensure that their money can still remain a safe payment anchor in this era. This article is an attempt to unravel the world of cryptocurrencies and highlight the opportunities that India faces with the introduction of the Digital Rupee.

About Cryptocurrencies

•  A cryptocurrency like bitcoin is a cryptography-based peer-to-peer electronic cash system, founded on blockchain and distributed ledger systems, that allow the transfer of values without any financial intermediary such as banks. 

•  Cryptocurrencies aspire to be a new, digital, encrypted, and decentralised form of currency. However, to be considered a currency, there has to be a unit and a defined process of issuance. 

•  A committee of International Financial Reporting Standards Foundation (IFRS) Foundation pointed out that cryptocurrencies cannot be treated as financial assets as cryptocurrency is neither cash nor an equity instrument. This is the reason why many countries have refrained from officially recognising cryptocurrencies, a privately owned/created store of value in an encrypted format, as a digital currency, an electronic form of fiat money issued by the government.

•  Other issues:

•   One, the technology is decentralised where there is no central agent to regulate or stabilise the value of the currency. 
•   Two, the transactions are slow, costly, non-scalable, and the process is far from simple.

So, clearly, if digital money has to exist, central banks have to play an important role as a regulatory, supervisory, and issuing authority.

Concept of Digital Rupee

The current digital landscape of India makes a strong case for introducing Central Bank Digital Currency.

Why India is suitable market for it?

•   Demonetisation in 2016 led to about a hundred-fold increase in digital payment transactions in India. 
•   An increase in the availability of low-cost smartphones and low-cost 4G data has further deepened digitisation in India.
•   India pioneered the digital transactions space with the creation of the vastly successful Unified Payments Interface (UPI) back in 2016 and the revolutionary Jan-Dhan Yojana. 
•   The Digital India campaign today stands on the pillars of inclusivity, accessibility, and financial security for all. The ripple effects can be felt across the financial system in India.

Efforts by the government

•   With the Budget of 2022, India has officially stepped foot into the digital currency space. The Finance Minister proposed to introduce a Central Bank Digital Currency (CBDC)– a digital version of the rupee, using blockchain and other technologies, starting 2022-23.
•   RBI had earlier proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch CBDC. Earlier this year, RBI also constituted a Fintech Department to facilitate innovation in fintech and supervise the current financial landscape in India.

Provisions of CBDC

•  A Central Bank Digital Currency is a digital token, similar to but not the same as cryptocurrency, issued by a central bank of a country. 

•  They are pegged to the value of that country’s fiat currency and enjoy government mandate as opposed to cryptocurrencies. 

•  Usually, token-based CBDC doesn’t require the two parties to have a bank account; a person can pay with CBDC much like a payment made in cash. A BIS publication6 highlighted three different ‘variants’ of CBDC: 

1. Account-based, where Central Bank allows people to open an account and transfer money between account holders. 

2. Token-based or retail-based, where each token represents ‘digital cash’ for use by the general public or non-banking entities. 

3. Wholesale-based, where a restricted-access digital token is issued for wholesale settlements like interbank payments and even, cross-border payments. 

Account-based CBDC can offer a direct substitute to traditional demand deposits in India. While there is a great potential to implement both the wholesale and retail-based channels to reduce both retail transaction costs and make existing banking institutions more effective and efficient. It can also enhance the financial independence of banks.

Proposed benefits

•  There is a diverse range of virtual currencies being circulated and the market currently is extremely fragmented, CBDC will help in streamlining it.

•  Cryptocurrency is largely decentralised with no issuance authority behind it which makes it a less trusted source of investment, if backed by Central Bank, then it will be more trusted.

•  India’s own digital fiat rupee that will promote financial inclusion and increase demand for real money balances. It will ensure privacy, transferability, convenience, accessibility, and financial security.

•  The introduction of CBDC will also help in reducing the cost of transactions for corporate consumers, particularly large ones, across borders.

•  India’s high currency-to-GDP ratio holds out another benefit of CBDCs that can replace large cash transactions and reduce the costs that the central bank bears for printing, transporting, and managing cash. As per RBI’s Annual Report, the printing money bill stood at a staggering Rs 4,000 crore. 

•  CBDC currency is hard to duplicate or counterfeit and is secured by consensus mechanisms that prevent tampering.

•  Once the use of digital currency becomes widespread, backed by the government’s mandate, it can be used in Direct Benefit Transfers (DBTs) to the vulnerable population ensuring increased exposure to digitisation and quick financial assistance at the same time. 

•  CBDC will also be a further push to e-commerce with the greater trust of the masses in digital transactions that are backed by the government.