India has moved quickly and decisively toward the introduction of its digital currency. Some banks have already started educating their customers on the advantages of the E-Rupee and how to connect their bank accounts to CBDC wallets.
What is Digital Rupee?
The RBI issues the Digital Rupee, or E-Rupee, as a digital token and legal tender. It is a Central Bank Digital Currency (CBDC) designed to make transactions safer and speedier. Banks will issue and distribute Digital Rupees in the same way as physical cash, and consumers will be able to deal with E-Rupee using digital wallets offered by participating banks. These wallets will be stored as applications or similar platforms on mobile phones or gadgets. The Digital Rupee differs from the Unified Payments Interface (UPI), which is an interface for making real cash transactions. E-Rupee has the same value as cash and is issued in the same denominations as paper currency and coins.
Need for Digital Rupee in India
The introduction of the Digital Rupee in India aims to boost the country's digital economy and provide a safe and secure digital experience during monetary transactions. Users can transact using E-Rupee through digital wallets provided by participating banks, which will be stored on mobile phones or devices as applications or similar platforms. The Digital Rupee, which uses blockchain technology and has the RBI as a backer, eliminates the need for a bank middleman in online transactions.
The Digital Rupee will not replace the traditional rupee but will be counted as an additional legal currency in circulation. It will also curb counterfeit currency and offer the flexibility of real-time conversion to other forms of money, like deposits with banks. The RBI launched the first pilot for retail Digital Rupee in December 2022 in four Indian cities, and residents can use digital wallets provided by partnering banks to exchange digital rupees. The RBI has licensed four banks to issue and distribute the Digital Rupee: State Bank of India, Yes Bank, ICICI Bank, and IDFC First Bank. While plenty of models on how the Digital Rupee will work have been proposed by technology experts, a formal announcement by the RBI will detail the entire process and make things clearer.
Cost of getting Cash around the World
Countries first acknowledged paper money as legal tender approximately 300 years ago. While much has changed in the way we manufacture, sell, and purchase goods, cash has remained a constant. According to the IBGC, Delhi people spend 60 lakh hours and ₹9.1 crores merely to get cash! According to a Visa study, digital payments can slash cash costs from 1.7% to 1.3% of GDP, saving India a massive ₹4.7 lakh crores by 2025!
Digital Rupee vs Cryptocurrencies
Digital Rupees and cryptocurrencies differ in several aspects. Digital Rupee is a centralized form of money issued and regulated by the RBI, while cryptocurrencies are decentralized and operate independently of any central authority. Digital Rupee is a legal tender, issued in the same denominations as paper currency and coins, and is tied to the value of the existing rupee, ensuring stability. In contrast, cryptocurrencies are volatile and not considered legal tender in India.
Digital Rupee relies on blockchain technology, with the RBI as the guarantor, and does not need a bank intermediary for transactions. Cryptocurrencies, on the other hand, are based on decentralized networks and cryptography for security. While the Digital Rupee is primarily used for payments and monetary transactions, cryptocurrencies can serve as both assets and currencies.
Why does India want a Digital Rupee while UPI is already in place?
Despite the UPI surge, India's physical cash in circulation reached a record high in October 2022 of ₹30.9 lakh crores, which is 72% more than before the demonetization. The takeaway is simple: provide Indians with a payment method that can be utilized offline and without a bank account if you want them to avoid using cash.
The Role of the Government in Promoting Digital Rupee
The government plays a crucial role in promoting the Digital Rupee in India by supporting its development, implementation, and adoption. The RBI is responsible for issuing the Digital Rupee and ensuring its stability and security. The government can facilitate the integration of the Digital Rupee into the existing financial infrastructure, making it easier for citizens to use it for transactions. Additionally, the government can create policies and regulations that encourage the use of the Digital Rupee, such as programmable payments for subsidies. By promoting the Digital Rupee, the government aims to boost the digital economy, support infrastructure development, and enhance financial stability. Moreover, the government can collaborate with private companies to ensure transparency and curb potential illegal activities.
How to Use Digital Rupee for Financial Transactions?
Users must have a digital wallet provided by participating banks, including SBI, HDFC Bank, and ICICI Bank, to use the Digital Rupee for financial transactions. These digital wallets will be stored in the form of applications or similar platforms on mobile phones or devices.
Transactions with the Digital Rupee can take place between person-to-person (P2P) and person-to-merchant (P2M). Similar to internet transactions, users can make payments using E-Rupee utilizing QR codes displayed at merchant locations. The Digital Rupee allows for flexible real-time conversion to other currencies, such as bank deposits. It provides characteristics of actual money, such as trust, safety, and settlement finality, and does not accrue interest.
Digital Rupee Adoption Rate in India
As of February 8, 2023, the Digital Rupee has reached 50,000 users and 5,000 merchants. To increase the adoption rate of the Digital Rupee in India, the focus should be on scalability, regulatory and privacy framework, operational standardization, and technological considerations. The CBDC wallet design must be user-friendly, convenient, stable, multi-lingual, and offer voice-controlled functions to ensure a positive user experience.
The legal and regulatory framework should be in sync with the existing financial system and address concerns related to KYC norms and compliance. The government and RBI should collaborate with banks to ensure that the underlying technology offers maximum interoperability with legacy systems. Additionally, promoting awareness and education about the Digital Rupee and its benefits can help increase its adoption among the general public and businesses.
Challenges and Concerns in Implementing Digital Rupee
Implementing the Digital Rupee in India comes with several challenges and concerns, which are as follows:
1. Technological Challenges - Ensuring the underlying technology is secure, scalable, and interoperable with existing financial systems is crucial. The Digital Rupee relies on blockchain technology, which may require significant investments in infrastructure and expertise.
2. Regulatory and Legal Framework - Aligning the Digital Rupee with existing financial regulations, addressing KYC norms, and ensuring compliance with anti-money laundering and counter-terrorism financing laws are essential.
3. Privacy and Security - Protecting users' personal and financial information while maintaining transaction transparency is a significant concern.
4. Financial Stability - The introduction of the Digital Rupee may impact the demand for physical cash and bank deposits, affecting the overall money supply in the economy.
5. Public Awareness and Adoption - Educating the public about the benefits and usage of the Digital Rupee is necessary to ensure widespread adoption. Additionally, addressing concerns related to digital literacy and access to technology in rural areas is crucial.
6. Competition with Private Digital Currencies - The Digital Rupee may face competition from existing digital currencies and payment platforms, requiring the government to create policies that promote its adoption.
The Way Forward
The future of the Digital Rupee in India looks promising as it aims to revolutionize the financial landscape and boost the digital economy. The Digital Rupee is expected to improve the ease of transactions within the country and across jurisdictions, reduce the costs associated with printing and managing physical cash, and prevent the counterfeiting of currency.
The Digital Rupee will be backed by blockchain and other technologies, ensuring security and transparency. It is likely to favor the state's ability to analyze financial flows, unlike non-state cryptocurrencies that emphasize user privacy and anonymity. The government may introduce new products and services using the Digital Rupee, such as smart contracts.
As the Digital Rupee pilot progresses, it will help identify gaps in the national digital payment infrastructure that need improvement before a nationwide launch. The introduction of the Digital Rupee is expected to create new opportunities in the FinTech sector and encourage innovation. However, challenges such as technological integration, regulatory frameworks, and public awareness need to be addressed for the Digital Rupee to reach its full potential.
References:
[1] https://www.forbes.com/advisor/in/investing/digital-rupee/
[2] https://timesofindia.indiatimes.com/blogs/voices/digital-rupee-everything-you-need-to-know/
[5] https://indbiz.gov.in/all-you-need-to-know-about-the-digital-rupee/
[8] https://blog.forumias.com/digital-rupee-advantages-and-challenges/