The Reserve Bank of India (RBI) launched the digital rupee (e-rupee) on December 1, 2022, on a pilot basis. E-rupee is an electronic form of sovereign currency, approved by the RBI as a legal tender. The e-rupee is the same as the fiat currency (rupee or note). The only difference is that it exists in digital form. The denominations of the digital currency are also the same as those of the physical currency in circulation. RBI has chosen eight banks for the pilot use—SBI, ICICI Bank, YES Bank, IDFC First Bank for the first phase, while Bank of Baroda, Union Bank of India, HDFC Bank, and Kodak Mahindra Bank will join the second phase. E-rupee has been initially launched in four cities—New Delhi, Mumbai, Bengaluru, and Bhubaneswar.
Digital currency can be used in transactions using a digital wallet which can be saved on smartphones. Both P2P (person to person) and P2M (person to merchant) transactions can be made with digital currency. Digital currency can be withdrawn in the same way cash is withdrawn from banks and can be stored in wallets and transferred with an app. RBI’s e-rupee programme was initiated in both retail and wholesale domains. Retail e-rupee is for retail transactions that can be used by everyone as it is the digital form of cash. On the other hand, the wholesale e-rupee is designed to be used by selected financial institutions with restricted access. It is mainly introduced to make inter-bank transactions and trading government securities easier.
How is E-rupee Different from UPI and Cryptocurrency?
The Government of India, along with many other governments, has strongly opposed accepting crypto payments and transactions and imposed heavy taxes on them. So, it is important to know the difference between both the currencies.
One of the major differences is that e-rupee is backed by the central bank while the crypto currency is a decentralised currency that is not backed by any sovereign entity. However, payments in both the currencies happen immediately.
UPI transactions happen between banks. UPI is just a platform to make easier and faster payments. Though banks are involved, digital currency itself is a currency and payments happen instantaneously as the money is programmable.
Advantages of E-rupee
Some of the advantages of e-rupee are as follows:
- Digital currency can reduce dependence on physical currency (cash). The cost of printing money is very high. According to RBI, the cost of printing for (released as a part of RTI) Rs 10 note is Rs 1.01, Rs 20 note is Re 1, Rs 50 note is Rs 1.01, Rs 500 note is Rs 2.57, and so on. It costs the RBI crores of rupees to print, store, maintain, and distribute notes.
- With digital currency, India can encourage trade directly in digital currency rather than using the US dollar as the trading currency which will reduce the dependence on the dollar and could make the rupee a superior currency. Also, it will make cross-border payments easier.
- Digital currency can act as a regulated intermediation that which public can use without the fear of risk or stability. It also does not affect the monetary and financial ecosystem as it resembles the fiat currency but in digital form.
- Digital currency is also perceived to be environment-friendly as it reduces the use of paper and coins.
Challenges with E-rupee
Apart from advantages of e-rupee, there are certain challenges, as well.
- One of the first concerns is security and privacy. Sensitive data is available and stored while using a digital rupee. It requires high technology and security protocols to ensure that the data and the money of users are safe.
- Digital transactions can be traced back to their source. So, e-rupee may not be used with anonymity like the physical currency.
- If consumers convert the bank deposits into digital rupee, it will reduce the deposits of the banks and might impact the loans created by the banks. Since the digital rupee will be available throughout the day and night, consumers can convert their entire deposits into digital rupee if there is any news about any bank. This type of immediate withdrawal will lead to bank runs which could be dangerous, especially during a recession or crisis.
Conclusion
E-rupee could be a revolution in the 21st century. With digital transactions and UPI transactions growing all over the world, the e-rupee could be a step ahead. E-rupee can reduce costs to the government and make cross-border payments easier and faster. But, it is also important to note that many developed countries, despite researching digital currency, did not implement it due to privacy and cyber security concerns. Digital currency may make banks and economy unstable with the funds made available throughout the day. Considering the previous Aadhar data leaks due to loopholes and low security, the government must employ high-tech security infrastructure to enable safe transactions. Linking the transactions of the digital rupee with KYC norms and sending messages to phones on every user may be considered to prevent fraud. India also needs digital literacy. Even though digital and UPI transactions have grown over time, digital literacy is still low in India. So, the government needs first to make people aware of the e-rupee all over India.
© Spectrum Books Pvt Ltd.