How will digital rupee be different from rupee notes?

The boom in digital payments and transactions in India on the back of a global class payments system and infrastructure built over the past few years may have encouraged the government and the RBI to move on the Central Bank Digital Currency or CBDC front. It is thus natural to ask how the CBDC is going to be different when digital transactions as low as one rupee can be carried out through digital wallets, UPI, cards and other platforms. Currently, central banks such as the RBI issue currency in physical form – through notes and coins. These are all backed by government securities or gold, providing security and safety to users or the public and easy transferability.

Digital modes of payments and transactions too offer ease. But the difference is that there is a settlement process involved at the back-end, say when a shopkeeper does a transaction with a customer. That settlement happens with a slight lag. But in a digital currency transaction, say between you and the local street vendor, it will be instant once you access your digital account if the central bank offers one or through banks or other financial sector firms which are authorized to open such digital accounts or ledgers. There is no such settlement as in the case of other digital payment modes. This assumes that both the customer and the vendor have a virtual account. The CBDC obviates the need to carry currency notes or coins in your wallet. The whole process will be made possible using blockchain technology. The requirement of ATMs may reduce over time.

Theoretically, this speed of transactions could further boost economic activity or the velocity of the money supply – a metric central bankers and monetary economists look at.

So, what’s in it for individuals, households or businesses? Convenience for one. Also, greater liquidity and safety and the comfort that like the physical currency, the digital currency is backed by the central bank. For businesses, this could offer faster payments and perhaps at a much lower rate if the RBI is able to ensure that the infrastructure costs are competitive.

But broadly, a digital currency is meant to be an option – just like a digital wallet, credit or debit cards, the instant payment services or electronic fund transfer. So physical currency will not vanish or be replaced in a hurry, especially in a country with millions of the unbanked and a low financial literacy or awareness. In the future, RBI and other central banks will continue to provide physical currency alongside a digital rupee.

For the RBI, its balance sheet will not sport a different look with digital currency just like physical currency figuring as part of its liabilities. But more importantly, if the digital currency takes off or gains volumes, the central bank will have less of a burden. That’s because of the challenges and the cost involved in distributing currency across the country, not just for the RBI but also banks that maintain currency chests countrywide.

There are also risks arising from a digital currency. Privacy of consumers is certainly a concern, given that, unlike in the case of banknotes, virtual accounts can be tracked – something which RBI Governor Das too acknowledged on Thursday. So is the risk of hacking, cybercrimes in the digital world. Little surprise therefore that most central banks are working on addressing these and finding the right balance. And in India, the added challenge of creating awareness, education, and improved digital connectivity.

Just like its global peers, the RBI too could well start with pilot projects and assess whether the benefits outweigh the risks before unveiling its CBDC – perhaps much later than the 2023 rollout date announced by the finance minister.