Clarity of intent should define our digital rupee
PremiumAs RBI prepares to launch an e-rupee that could serve multiple ends, we must debate exactly what it’s for. Even with some flexibility of design, we must get its basics right at the very onset
Imagine an ancient village that uses sacks of grain as a unit of exchange. A central granary is found to save cost, so it comes up, and farmers are issued IOU slips for the bags they put in. Since these notes promise grain and do not need to be lugged around, they soon start being used to buy stuff. Even less of a hassle, the granary realizes, would be to keep a reliable record of bag numbers as they shift from one person’s tally to another for daily payments. Such systems did exist in olden days, studies show. Credit tokens have always acted as money, even after the trust earned relieved issuers of any need to hand over grain (or gold) on demand. Economies running on ledgers also have a long history, having thrived in the middle ages. Today, as bits and bytes can combine to create virtually anything online, finance gets increasingly complex and the Reserve Bank of India (RBI) works on the creation of a digital rupee, we must get the basics of its design right.
Form must follow function, just as clarity of purpose must precede an e-rupee. At one level, it would be prudent for the Indian rupee to outflank any crypto contender for its role. The adoption of blockchain ledgers shared online that underpin the success of innovative digital tokens could achieve that. At another level, the exact needs we aim to fulfil with an e-rupee should guide its design. Its eventual reach may depend on this. On paper, an e-token issued by RBI could serve as a tool of financial inclusion, with wallet-apps placed on web-linked devices for people to make payments and receive state handouts. All this, without any need to involve banks. For it to help the needy, though, we would have to close our digital divide. As for an e-rupee’s public appeal, bank users with online apps can send money at the swipe of a thumb within the country via UPI anyway, so its ease-of-use and edge-on-cost could instantly attract user looking to make costless transfers across borders, a fee-laden field right now that deserves a good shake-up. Its launch would relieve remitters of money from abroad, even if initial limits are needed to keep capital flows calibrated (for stability) while we sandbox test e-rupee enablers like ‘smart money’ (that can be set to move as directed). While China seems keen to combine its e-currency with export clout for a global agenda of trade ‘yuanization’, India’s best bet at this stage would arguably be to focus on the basic utility of an e-rupee.
A couple of calls invite debate, both related to how e-cash will be held with our central bank. Will it be as small sums in e-wallets or as deposits in accounts? While interest paid on balances may make it easier for RBI to ease or tighten monetary policy in time to come, it also risks a flight of other bank deposits to its safety, which would willy-nilly deprive lenders of business. Perhaps we could begin with capped wallets and keep the other option open. The second call, however, would be hard to undo. How close to paper cash will India’s e-money be? Nigeria’s e-naira, for example, is aimed partly at an informal sector clean-up, for which its usage would have to be more scannable than scrambled. Hack exposure apart, such an approach would limit adoption and lend cash a future as a privacy assurer. If anonymity of use is not on offer, data security will have to be foolproof. Either way, 2022-23 could see the launch of an idea whose time has come. And since it’ll be pegged to a rupee we’re already familiar with, its core trust-earner would be no different: purchasing-power stability.
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