In layman terms, digital currency is any form of currency that is available exclusively in electronic form. Given the wide ambit of the definition, there are several forms of digital currency that exist. For example, recently, ‘cryptocurrency’ has gained traction. Cryptocurrency is nothing but a form of digital currency that is highly encrypted, stored on a peer-to-peer network and decentralized. As an extension, the famous ‘Bitcoin’ is a manifestation of digital currency that facilitates the exchange of goods and services exclusively on decentralized digital platforms. Conversely, on the other end of the spectrum, countries such as China have been aggressively involved in launching fiat digital currency, also known as Central Bank Digital Currency (“CBDC”). In contrast to cryptocurrency, which is characterized by decentralization, CBDCs are issued against the Central Bank of a country and thus operate as legal tender. In essence, CBDC is “legal tender issued by a Central Bank in digital form, which is exchangeable with one-to-one fiat currency”.
Five countries, namely - the Bahamas, Antigua and Barbuda, Saint Kitts and Nevis, Saint Lucia and Grenada have fully developed and launched CBDC systems. Countries such as European Union, United Kingdom, and the United States, often at the forefront of the crypto race, also seem to be taking stock and deliberating the launch of CBDCs. Further, with the introduction of the e-RUPI, India also seems to be taking steps in the direction of embracing CBDCs.
Merits and Demerits of CBDCs
The most obvious advantages of CBDCs are linked to their electronic nature. CBDCs would ease the difficulty of cross-border transactions. The only prerequisite for holding CBDCs and utilizing them as a substitute for physical currency would be a smartphone that supports the technology. Further, a major reason governments are pushing CBDCs is to counter the volatility of private digital currencies. Additionally, since all the information is stored on a digital platform available to the issuing authority, illegal activities are easier to catch. CBDCs are also believed to incur lesser costs than printing and distributing physical cash, since all the costs are to be borne electronically.
From the perspective of consumers, CBDCs bring in accessibility, expeditious, cheaper transactions and high security. A digital wallet is instantaneously available. Deposits can be withdrawn or installed at any point of time. Moreover, using the digital wallet does not require a Bank Account, thus increasing accessibility. However, on the flip side, as with anything stored in a digital format there are privacy concerns that arise vis-a-vis CBDCs. The issuing authority will have access and knowledge to the manner in which the CBDCs are being utilized because of the centralized technology on which the digital currency is stored. From a logistical perspective, enforcement, and implementation of CBDCs, especially for a country like India is a task of mammoth proportions. Further, since deposits of CBDCs do not generate any interest, it results in lower returns for the banks.
India’s e-Rupi System
Right after the Keynote Address delivered by the Deputy Governor of the RBI regarding the scope and future of digital currencies, the e-Rupi digital platform, developed by the National Payments Corporation of India, was launched. The platform is a cashless and contactless instrument to be used for making digital payments. The key features of the e-Rupi are:
- It operates as a digital voucher that can be directly transferred from one phone to another via an SMS string or QR code, thus eliminating all intermediaries and the need for a bank account.
- The vouchers are purpose specific. Meaning, that once a voucher has been issued, it can only be used to redeem the objective of issuance. For example, it could be issued to pay for a TB shot at a government clinic. Only once the shot is given, the benefit is accrued to the beneficiary - the clinic receives the payment only after the shot is given.
- The details of the beneficiary are kept completely confidential.
- This system is intended to be used advance the ease of implementing welfare schemes such as delivering services for drugs and nutritional support under Mother and Child welfare schemes, disease eradication programs under the Pradhan Mantri Jan Arogya Yojana etc. Conversely, the vouchers are available to the private sector as well to pursue employee welfare and corporate social responsibility schemes.
- No internet access is required to redeem these vouchers in the interests of inclusion and accessibility.
- The platform has collaborated with Department of Financial Services, Ministry of Health and Family Welfare and the National Health Authority to further welfare schemes.
Per the RBI, the Indian economy as it stands today is conducive to the proliferation of CBDC’s because of its high currency to GDP ratio, increase in digital payments, spread of private virtual currencies and as an extension, the need to mitigate the volatility of private currencies. The RBI is still exploring the possibility of injecting the financial ecosystem of the country with CBDCs. Nonetheless, the e-RUPI reflects the pro-digital payment stance of India. Governments, economies, and administration must keep up with the fast pace of technological development. While the use of the e-RUPI is currently limited to welfare schemes, the scope of expansion qua private sector and other schemes is massive. Touted as a positive move, it promotes digital end-to-end transactions, much like crypto sans the volatility and decentralization. That being said, the actual impact of the system on welfare schemes and the digital ecosystem of India is yet to be seen.