Digital Rupee: Game Changer or Disaster?

The Reserve Bank of India launched the pilot for something called the central bank bank digital rupee which is the central bank digital currency of India. And this digital rupee is a very big leap in establishing the next generation financial system for India. Important point to note is that it's not just big deal for India but even for China, France, Switzerland and America because of which all of them are in the race to crack the code for the central bank digital currency(CBDC).

How is this system different from all the existing modes of payment that we already have in our system? 

The first thing you need to understand is the basic concept of money. When a person say Abhishek gives Parul a note of RS100, what he is really giving Parul is a promise by the RBI to pay, who is the bearer of the note, RS100. So the RS100 note is a legal tender which means it can be used to pay for any transaction in India. Now, CBDC does the exact same thing but in the digital format. And just like RS100, a central bank digital currency is a form of currency note issued by the central bank. It's just that instead of the physical form, it is in the digital form. So it's not backed by a physical commodity such as gold or silver. It's only backed by the government that issues it. So instead of printing money, the central bank issued electronic coins or accounts bagged by the faith and credit of the government. So, central bank digital currency basically fulfills the functions of money as a medium of exchange and store of value.

This is just like sending money digitally via UPI, then how is CBDC different and how will it work? Well, if you look at the system from the consumer perspective, it's very similar but from the banking standpoint, it's completely different. For example, when I buy chips and I pay RS100 via upi, this money will be debited from my bank account and will be credited to the shop owners bank account. So, on the front end I get a notification saying RS100 has been sent and at the same time the shopkeeper gets a notification saying money has been received. But In reality trace money has not been received by the receiver's account at all because the way the system functions, a back end is that instead of immediately transferring RS100 every time someone sends RS100, what these banks do is they settle the data of transaction on a periodic basis. For example, let's say one HDFC customers sent 250 crores to ICICI merchants and ICICI customers sent 100 crores to HDFC merchants. So, instead of transferring and updating every single transaction, they will wait till the end of the day and transfer the net amount to each other. So, in this case, since HDFC customers sent 250 crores to ICICI and received 100 cross from ICICI customers, at the end of the day, HDFC will simply send 150 cross to settle the transaction with ICISI. So you see, although the ledger entry of the transaction happens instantly, the actual transaction takes a day or a week to be executed.

So, if this is very, very clear to you, let's come to the central bank issued digital rupee. Now, when I buy chips worth Rs30 from my account in the RBI, the money will directly go to the grocery owners bank account with the RBI. So, both the front and back end transaction will take place almost immediately and simultaneously. And the transaction is now in the RBI's ledger. So, just like cash, the money gets transferred from me to the shopkeeper. It's just that the same transaction has happened in the digital format now, in CBDC.

Advantages of central bank digital currency i.e., Digital rupee:-

1. It haw ability to take the financial inclusion beyond the geographical limitation, unbanked population and offline transaction. While most of us take the availability of physical cash for granted, the rest of the world and even in our own country there are certain geographical area where making physical money available is very big challenge. Lets take an example of Bahamas, this country introduced CBDC in 2020 called the sand dollar. It consist of 700 Scattered islands, so even it you have well established financial system it's a half day or full day trip to just get to the bank. So if you see sand dollar, cash is transferred digitally which makes extremely easy for People to access money. you don't even require bank account to make CBDC Payment. In our country India, we have a huge Chunk of population who do not have a bank account but still they have access to mobile and internet and here is where Opportunity of CBDC lies. In this case, even an unbanked customer with adhar number and smart phone can easily make a transaction. This way CBDC increases the scope of integrating the people into financial system. This also help RBI tracking more amount of cash in the System and giving facility to easy availability to credit to this kind of people and since it can be used offline digital currency can be accessed in the region of poor or no internet connectivity at all. So in short two people with no atm, no third party app, no bank account can make a transaction with each other with the CBDC technology.

2. Ability to pay remittance in a cost efficient manner. Remittance are fund people send to there home country while working and living abroad. Cross border transfers are very expansive. they charge 2-3% in commission and 3-5 working day to show the transfer. It is very costly for the migrants and for business, it takes away the profit margin itself. This is where the digital rupee expected to lower the remitted transfer cost and eventually made easier for the Indian living abroad to send funds to India.

Conclusion:

The Country which will crack the CBDC code first will have the huge upper hand over the rest of the world. One ahead of race right now is China. If the China able to bring down the commission to 1-2% and complete the transaction in 1-2 days than China is going to possess the finance superpower for the next coming century.