Is India ready to embrace Digital rupee?

 By Dr.Deepa Venugopal

In a historic move, Indian Finance Minister Ms Nirmala Sitaraman in her 2022 budget presentation announced that India will be launching its own Digital Rupee by 2022-2023. This announcement has evoked mixed response from business and commoners. But what made Ms. Sitaraman take this big plunge? Let us get some quick facts about how India has outpaced the world in digital transactions.

India recorded the highest number real time transactions in 2020 to the tune of $25.6 billion (more than 60% of China) surpassing China’s $15.7billion transactions & Korea’s $6 Billion transactions.  It is predicted that the value of these digital payments are likely to hit $1 Trillion by 2026. The success of India’s digital payment story can be attributed to high smartphone penetration, economical internet data, policy framework like UPI from NPCI, launch of BHIM – App, digital payments lead by BharatPe, Phonepay, Paytm, Razorpay, Gpay, Pinelabs etc. during the pandemic. They have helped to improve the financial inclusion & payment acceptance infrastructure in the country. Apparently, the next best move by the Indian government to grab a pie from this ever-growing digi-fin market is to launch its own digital (currency) rupee.  

Wait a minute?? If your feel that the mechanism behind Digital currency and Digital payment is the same, then it’s time to check your assumptions.

Digital Currency vs. Digital Payment.

Digital currency – popularly known as Central Bank Digital Currency (CBDC) is a digital fiat currency and it does not necessarily have a physical correlate. The whole idea behind introducing Digital currency is to reduce the physical note in circulation, thereby helping economies go digital with the safest form of money and improve financial inclusion.

In case of a digital payment/acceptance, only the mode of payment changes. Rather than presenting physical notes, transfer of money happens electronically from your bank account to payee if you purchase through an e-wallet, debit card or credit card.

The biggest difference between a digital currency & digital payment is in its creation and maintenance. The digital currency is created, monitored and maintained by Central bank of the country (it is a claim on the central bank of the country).

In digital payment, liability will be on the commercial banks. The idea of a CBDC is a sweet rip off the crypto currency model – both rely strongly on encryption. But they will not be volatile like a crypto. Unlike crypto currency; CBDC is stable with both wholesale and retail financial institutions using it.

Types of CBDC

Two major classifications of CBDC include Wholesale and Retail CBDC. In case of retail CBDC- government-backed digital currency is used by consumers and businesses. The main advantage of for retailers is it helps to eliminate the risk of bankruptcy of intermediaries. The Retail variants of CBDC’s comes with two alternatives. (i) Cash Based DBDC which can be accessed through a digital wallet (ii) Account based DBDC which is like an access provided by bank account.

Wholesale DBDC’s are meant for banks & other financial institutions. It is like holding reserves in Central Banks and would be of enormous help in interbank transaction & settlements.

Why DBDC?

Digital Rupee has the potential to transform our payments systems and solve many problems. The biggest advantage of CBDC is “safety”. It helps reduce third party financial risk and eliminate the possibility of run-on Banks. Government won’t have to waste time, effort, and money in printing currency notes. It will eliminate the need for bank accounts. The current digital payments are linked to the money you have stored in your bank. But the Digital Rupee will be stored in an app on your phone. In India over 190 million adults don't have a bank account and we are the world's second-largest unbanked nation. Digital rupee can help bring these unbanked adults into financial mainstream. Cross-border payments and remittance become easy with CBDC as transactions take place quickly through the block chain without any intermediaries. CBDCs could be a great tool to eliminate corruption. Tracking of digital footprints becomes easy with CBDC, leading to better tax collection.

How ambitious is Digital rupee roll out??

Around 87 countries in the world are exploring CBDC’s of which only 35 countries are considering launching CBDC. Of the 35 only 9 countries have fully launched the CBDC.14 countries are in the piloting stage. A pile of challenges lies ahead of India as we plan to roll-out digital rupee. Let me highlight a few.

·      Decision on the ratio of paper money to digital money in circulation & setting limit for         withdrawal of money by citizens.

·        Finalise on the design of technology used for implementation for CBDC.

·       Privacy is one of the key elements of Digital currency. Do we have enough laws to protect privacy of users in virtual financial landscape? India is yet to pass the Data protection bill and there is no Data Protection Authority to resolve the compliance issues & financial grievances

·        Improve digital literacy & adoption.

·      To build cash-less society there should be robust digital infrastructure in place, which would lead to wider awareness and acceptance for digital transactions.

·     Zero overlap between various regulators & a good plan of action in case of breach of data privacy.

·         Be ready for the big disruption awaiting the Financial & banking space.

 Despite all these challenges it is still worthwhile to embrace Digital Rupee, because

                “A journey of a thousand miles begins with a single step”