DIGITAL CURRENCY IN INDIA :

CAN IT REPLACE PAPER MONEY?

The evolution of money is quite interesting. Right from the barter system to cashless transactions, the money system has undergone immense and fascinating changes.

In another revolutionary move, the Reserve Bank Of India (RBI) is getting ready to launch India’s digital rupee in 2023. Also termed Central Bank Digital Currency (CBDC), it would be issued and controlled by the RBI like physical money. It can be both stored and used as a medium of exchange.

Does this mean we will be bidding goodbye to physical currency forever?

Let’s explore the concept of the digital rupee in depth to arrive at an answer.

Why is it necessary to have digital currency in India?

Ever since COVID-19 happened, people have found comfort in digital transactions. Not many prefer to keep physical cash, with digital wallets serving the same purpose as a physical wallet.

Payment methods like UPI (Unified Payments Interface) and IMPS (Immediate Payment Service) have almost become the staple payment model of the larger population. With digital transactions being a norm, one might wonder what difference can the CBDC currency bring about in the existing scenario.

CBDC is quite different from traditional digital payment methods. It doesn't require one to link their bank accounts with a payment system like how it is required for wallets like Gpay, Paytm, etc. Contrary to UPI and IMPS, CBDC also does not require money transferred by these methods to be backed by physical currency. One major advantage of the digital rupee is that transactions will be settled instantly as they will be done via a clearing house that is directly backed by the RBI.

Many countries around the world have started to embrace a centralized digital currency for ease of convenience. India following suit could help cut costs on physical currency issuance and cash transactions.

What are the features of the digital rupee?

CBDC or digital rupee has a set of features that makes it desirable, which are as follows:

CBDC is a sovereign currency issued in compliance with the monetary policy of the RBI.
It can be easily converted against a commercial bank’s cash.
CBDC is a fungible formal offer for which holders are not required to hold a bank account.
The transaction costs involved in CDBC currency are cheaper.
It is a way for a government authority like RBI to directly disburse money to citizens without the need for intermediaries.

Types of digital rupee that the RBI is likely to introduce

CDBC - R This type of digital currency is slated to be issued for general purposes or retail needs. It can be used by private entities, non-financial institutions and businesses. The primary motive for considering the issue of CDBC-R is to enable financial inclusion. It can be issued as a cryptographic token with similar features as that of bitcoin.
CDBC - W Wholesale CDBC is proposed to provide restricted access to financial institutions. This CDBC currency can be used for improving the efficiency of interbank payments. It is stated to have the potential to make settlement systems more efficient and secure.

Is digital rupee a cryptocurrency?

While cryptocurrencies are private in nature like Bitcoin and Ethreum, the digital rupee will be under the control of RBI. Also, the digital currency will be issued by RBI, meaning it cannot be mined and obtained like bitcoin. Even though both are digital forms of payment, cryptocurrencies work on a decentralized network.

Digital currency vs cryptocurrency

Ever since the pandemic happened, majority of the people have shifted to using digital wallets more. Even though these wallets can store both cryptocurrency and digital currency, they cannot be used interchangeably. While digital currency is the digital form of physical cash, cryptocurrencies are a store of value that is secured with the help of encryption.

The following are some of the major differences between digital currency and cryptocurrency:

While digital currency is an electronic form of money that can be used as part of contactless transactions, cryptocurrency is a store of value that is secured by encryption.
Cryptocurrency is decentralized and unregulated while digital rupee is regulated and centralized.
Digital rupee value is stable and accepted widely but cryptocurrency rates are highly volatile and they are not widely accepted yet.
Digital currency does not need encryption but the places where it is stored like digital wallets and banking applications need to be secured with strong passwords. Cryptocurrencies on the other hand are protected by strong encryption.
Transactions undertaken with digital rupee are available only to the people involved in it such as the sender, receiver and the bank. In cryptocurrency transactions, all details are available to the public via a decentralized ledger.

How does the digital rupee work?

The digital rupee is defined by the RBI as a secure, reliable and convenient alternative to physical currency. It is also touted to take the form of a financial instrument. The digital rupee would be transferred via a token - based system. According to this system, the person who is supposed to transfer the currency should have the recipient’s public key (consider it as an email address). It is then transferred with the help of the recipient’s private key (Something similar to a password).

Transactions involving the digital rupee are likely to be anonymous. But those transactions where the digital rupee value is higher will have to be disclosed mandatorily.

The RBI is also not looking to provide interest on digital currency. This is because as per the regulatory organization, providing interest on digital currency in India may prompt the public to withdraw funds from banks and convert them into digital form. This is likely to adversely affect the country’s banking system.

What are the advantages of digital currency in India?

The growing importance of cryptocurrency has prompted the issue of CBDC currency. With more and more people adopting cryptocurrencies like Bitcoin, the RBI has realized a means to regularize people’s adoption of these cryptocurrencies, which is by introducing the digital rupee to public.

Some of the advantages of digital currency are as follows:

Digital rupee aims at providing financial inclusion along with improving transparency and efficiency of transactions.
Adoption of digital rupee will help reduce costs involved in transactions and account settlements can be hastened.
These digital currencies do not require a bank account to be opened.
Digital currencies are centralized meaning they would be backed by the RBI. This would help prevent the risk of volatility associated with cryptocurrency.
Physical notes are subjected to wear and tear which can be prevented with the introduction of digital rupee.
It helps provide smoother cross - border transactions by reducing both time and cost. This is also effective in reducing the risk associated with such settlement transactions.
Digital currency can help reduce the burden of printing and handling of cash.
It will play a huge role in digitizing the economy and reducing the costs involved in financial transactions.
Digital rupee can be exchanged into cash.
The introduction of digital currency can help prevent the production of counterfeit money thus, helping eliminate corruption and black money.

What are the disadvantages of digital rupee?

Despite the benefits of digital rupee, it also has some negative aspects, which are listed below:

There is an increased chance of the digital rupee being vulnerable to cyber attacks.
CBDC currency transactions can be tracked and accounted for, unlike physical cash transactions, reducing privacy.
The impact of digital rupee on countries that still don’t have full capital account convertibility is unknown.
Digital currency is susceptible to legal and regulatory issues.
Since digital rupee is relatively new and is just developing, the future potential of the currency remains bleak.

What are the challenges involved in implementing digital currency in India?

Some of the proposed challenges that are likely to crop up with the introduction of digital rupee are as follows:

It is important to identify the long-term problem to which the introduction of digital rupee might act as a feasible solution. This is because UPI is the current most preferred method of digital payments and it is also faster and efficient. Hence, it is necessary to promote CBDC currency as a solution to a significant problem, prompting people to consider opting for it.
If the digital rupee attains popularity and the RBI fails to implement a limit on the amount that can be stored in digital wallets,it will pose a hindrance to weaker banks that hold modest deposits.
The amount of security and privacy this form of currency might provide its holders remains a challenge.
Digital rupee is proposed to be developed with the help of blockchain technology, where scalability can be an issue.
The design of the digital rupee also needs to be considered carefully to ensure accessibility to even those who are not much proficient in digital literacy.

Will digital rupee completely replace paper money in the future?

Even though many people still consider cash as a more preferable method of payment, introduction of the digital rupee is sure to come with its own set of benefits. It is bound to increase the convenience factor, reduce the cost of transactions and will make financial transactions efficient.

However the move to a completely cashless society can take place only if the public wills. This is because there are quite a number of people like senior citizens, rural communities, etc who would still prefer physical money over digital currency despite the numerous advantages that it offers.

It is evident that the future will most definitely lean towards a completely digitized financial system. People these days too prefer digital modes of payments over cash transactions. Hence, it is all the more important for businesses to digitize their transaction methods to not lose out on the digital wave.

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