Digital rupee: A step closer to cashless economy

As debate on cryptocurrency’s legal acceptability continues, the Reserve Bank of India (RBI), with government backing, has piloted the launch of India’s sovereign digital currency, which will have a legal status, ensuring financial inclusion. Unlike cryptos that are not equivalent to sovereign currency, the central bank digital currency (CBDC) has been used for wholesale & retail segment use-cases - for peer-to-peer (P2P) and for peer-to-merchant (P2M) transactions.

Owing to this, digital rupee is far more acceptable as instrument of domestic and global payment settlement as well to organisations, companies, financial services.

Appetite for digital currency

Post demonetisation, digitisation of payments has made cashless economy a reality. UPI transactions have witnessed a spectacular growth of 57 per cent in value and 73 per cent in volume over the past year.

How does e-Rupee work? How’s it different from cryptocurrency and UPI?

CBDC or e-rupee will lead to several improvements: enabling real-time transaction settlements on same day, have traceability and ledger maintenance, ushering in transparency, efficiency and resilience in currency management system and strengthening financial inclusion which could enable easy monitoring of Direct Benefit Transfers (DBT) and other government programmes, thereby reducing malpractices in payment system, adding another dimension to digital governance.

However, key to success of such a currency will be its economic design. The government will have to look at issues like interest on digital rupee in case of bank deposits or whether there will be limits on individual holdings and transactions.

Globally, 10 countries have already launched CBDCs, with China- the first large economy, in 2020. The Bank of International Settlements is already doing a pilot with various countries and last November the US Fed announced the launch of its CBDC concept pilot as well.

Robust technological framework

The critical aspect for implementation and widespread use of digital currency will be a robust technological infrastructure. Open-source blockchain technology is behind some of the important crypto currencies and the same will be utilised by RBI for the rollout and day to day monitoring and facilitation. A sound blockchain implementation will have to be achieved for not just adoption but for higher penetration and circulation within the country.

Privacy concerns

Another sphere where the authorities will have to do tight-rope walking will be to address privacy concerns as digital rupee will be exposed to tracking and monitoring for even the smallest transaction. Concomitant data protection laws will need to be put in place to maintain a sensitive balance between access to personal data and mandatory tracking threshold.

DH Deciphers | All you need to know about e-rupee

The pilot digital rupee does hold out a lot of promises for further ease of doing business at all levels of transactions. However, implementation of digital currency must tick all the mandatory boxes of security including network infrastructure, adequate privacy, and seamless integration with existing systems.

(The writer is Chief Digital Officer, Home Credit India)