Digital Currency is electronic money used for contactless transactions. It is not a new concept in the world and India is also set to adopt the “digital rupee”. With the fintech companies helping merchants and traders transact money directly through bank accounts using phone numbers or UPI codes, digitization of the rupee will provide an important role in the globalization of payment as the digital rupee will be equivalent to the physical rupee.
With the government's initiative of digital India strategies that have innovated and improved the digital structure of the country, the base for the digital currency has already been established. According to a report released by CLSA, UPI comprises 60% of the total online payments by volume and digital payments have risen from $61 billion in FY16 to $300 billion in FY21 and it is expected to grow to $1 trillion by FY26, which is approximately 30% of Indian Consumption. The introduction of digital currency will give a boost to the digital economy and will not be feared to be used by the citizens as it is sovereign-backed. Until recent times, trading in Cryptocurrencies was not an easy process as people feared fraud, money laundering, etc but CBDC makes it easier though the risk is not mitigated. With the inclusion of a 30% tax in cryptocurrency and to regulate cryptocurrency, the introduction of CBDC will play a vital role in order to account for the cryptocurrency held by the citizens.
But why is there sudden need for a digital currency? Countries find it difficult now to match the demand and the supply of physical currency. The cost incurred with it such as printing, storage, and distribution of paper currency can be reduced by the introduction of a digital currency. The popularization of Digital India and the introduction of a friendly digital payment system have reduced the use of the physical rupee in a physical cash dominating country. And the increasing demand for digital currency could give a chance of issuance of private currency which might lead to fraud and money laundering and will hamper the economy and the trust of the people in the Indian currency. To save the economy from the damage that can be caused by a private currency the RBI decided to issue a digital rupee, which would work as fiat money.
Looking at the advantages one may think why it was not implemented sooner or why are the developed countries still showing reservations about its implementation. One of the important impacts of CBDC is on banks. Banks would be severely hampered by this decision if the RBI gives the facility of storing and distributing the digital rupee, in effect it removes the banks as an intermediary. Thus, decreasing the demand for demand deposits and hence affecting the entire credit creation system of the banks. This could increase the cost of credit and the citizens depositing the money will have to pay a higher transaction cost, thus decreasing further demand deposit and putting immense pressure on the banks to even survive. This could have a long-lasting impact on the Indian economy and to which the RBI still does not have a solution for.
One other important factor is the privacy of data and cybersecurity. The privacy of transactions that physical cash provides cannot be provided as all the transactions would take place from RBI. Since the entire data is being stored in a centralized place it can easily cause data breaching problems and to prevent it from happening the right technology must be put in place. This adds to the expense of launching CBDC. The security of data would be an important factor to look at as it could lead to national security issues. The breach of the data could give some of the important critical information about the Indian economy which can pose threat to national security and the rivals can take advantage of.
The RBI has not yet set up the technology that will be used to make a digital rupee. The technology involved has to be efficient enough, so that it cannot be copied as it can cause the risk of generating fake digital currencies. Though it is a crucial task at hand, the cost involved is quite steep. The introduction of any fake currency will break the entire economy as well as the value of the rupee, which causes concern. Also, the technology should be secured and scalable as per the requirement of the Indian economy. This is a cautious and crucial step while deciding about the CBDC.
Though there are drawbacks, it can be the new future and the new normal where everyone uses digital currency and not the physical currency. With the millennials shifting to the use of digital payments the future does not seem so far. The launch may see some setbacks but if the concerns are considered while selecting the technology or forming a system where banks could be included, these drawbacks can be overcome.
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