E-Rupee — The present and future
The Reserve Bank of India launched the first ever Central Bank Digital Currency (CDBC) called E-Rupee on 1st December 2022.
You might have heard the above headline in the last few weeks. But what then?
Do we understand the possibilities it brings? Or the impact it might have on us as an individual?
And there is much more: the impact on businesses, global trade, rupee as a currency in Forex.
Do we understand the technicalities? How is this different from having a Paytm wallet? Or how is this different from Bitcoin? If you are aware of USDT, how is it different from USDT? How is this different UPI?
I observed the lack of understanding about Digital Rupee in the people around me. Hence, I am taking out a day of my life to write this.
The Present
Did you know the maximum number of transactions happening in India were in terms of pennies? RBI observed this. It has been hard to maintain change in our wallets. But ever since UPI was invented, we started using it to avoid the hassle of asking for a change.
However, UPI has it’s own limitation: you cannot transact more than 50k or 1L in a day, depending on the restrictions set by your bank.
One other limitation of UPI is about the chain of transactions that takes place to make one single transfer. Suppose, I have an account in SBI (kyuki mein gareeb hun) and you have an account in Axis Bank. If I were to transfer money to you, there would be three transactions taking place logically:
- Me giving the money to SBI
- SBI giving the money to Axis Bank
- Axis Bank giving the money to you
The above defined chain is one of the reasons why bank charge fees on online transactions via NEFT/RTGS/IMPS.
Why can’t I use credit it your account? Because our accounts are handled by Banks. That’s the reason they charge AMC (Annual Maintenance Charges).
What else? When transactions are taking place in cash, it’s hard for RBI to track the flow of money. Hence, it is hard for the Income Tax Department to know if someone if hiding their income. Ever wondered how real estate developers and doctors have so much money? And why are the corrupts in public and private sector roaming free? It’s all about cash.
The Future — Possibilities & Impacts
Before diving right in, let’s understand the technology and the concepts of ownership and liability.
Blockchain — The Technology
You might have heard the term “blockchain” over past years. I’m not going to explain it in depth, but will cover the important concepts to help you understand how it relates to digital currencies.
E-Rupee is built upon the blockchain technology.
We had this question at the start — how is E-Rupee different from Paytm wallet balance? The answers are below:
- With Paytm wallet, the balance is just a number stored somewhere in the Paytm’s database. And Paytm has total control over your balance. You do not own the money, and there’s no money to be honest. It’s just a number displayed on your screen.
- With E-Rupee, it is not just a number displayed on the screen. There is real money linked to the amount you have in your E-rupee wallet.
- In case of Paytm wallets, the company can show you Rs. 1000 in your wallet, without actually having Rs. 1000 in their bank account. In case of E-rupee, RBI can’t simply show Rs. 1000 if they don’t have it.
- The database is not central to RBI, unlike Paytm. Meaning, the database is distributed and available to public, in an highly secured way. Nobody could change the 1000 to 0, without actually making a transaction, in this case, withdrawal. Not even RBI. Only the one who owns the money can make a transaction with it.
Ownership & Liability
When you deposit some amount in your savings bank account, the bank is liable to pay some interest on it every year. Why do they do it? A lot of Indians do not understand this concept well.
Whenever you deposit some money in savings account, you do not only give it to the bank to keep the money secure. You, in reality, lend it to the bank and let them use your money. It is like you are giving the bank a loan for an undetermined period. And hence the bank pays you back the interest of that loan.
Here, you are the owner and the bank is liable to your principal as well as an interest on it.
So, what’s wrong with this?
Banks take money from you (your saving account) and give that money as a loan to someone else (educational loan, business loan, personal loan, home loan, etc). Basically, they are lending your money to someone else and they earn a higher interest on it. Then they give you a small interest, taking their cut in-between.
What if the ones who took loans from the bank run away without paying it back? The bank is still liable to pay you. It’s your money after all. But what if the bank doesn’t have any money left? It files for bankruptcy and you might not get your money back.
According to the rules of RBI, a bank is only liable to pay you upto 5L in case it goes bankrupt. If you had 10L invested in the bank (saving account, FDs, etc), your 5L are lost.
Now, when it comes to E-rupee, you are still the owner of your money. But the one who is liable is not the bank, but RBI. And you know RBI can print as much money as it wants. RBI is liable to pay you the total amount you have in your E-Rupee wallet anytime you want it.
Unless the RBI goes bankrupt.. which is only possible if the nation’s economy goes down.
Possibilities and Impacts
You will have an app installed on your phone, just like PhonePe or Google Pay, or any other Banking application like SBI Yono. The app will allow you to make transactions to other accounts via their account number or a QR code. And as said earlier, the balance showed on your app screen is the total liability of RBI to you.
How is this different from UPI then? UPI is a mode of payment and not a currency. And as said above, UPI still involves banks in the transactions that take place.
The possibilities that I can think of:
- Monetary activity can be monitored by RBI => reduced corruption and black money.
- Ease of trades across borders — payments across world to/from India would be lesser complex and will take lesser time.
- Rupee strength would increase in the Forex market.
- There can be an impact on the interest rates — it’s not the bank but RBI now.
Needs
There are only two needs that can I see:
- Acceptance — people should start accepting the digital rupee revolution.
- Security — with every single penny digitized, there’s a higher than ever need to have cyber security teams in place, to prevent and mitigate frauds and hacks.
Implementation
The RBI has decided to pilot launch the E-rupee. The pilot will initially cover four cities — Mumbai, New Delhi, Bengaluru, and Bhubaneswar. It will later extend to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.
Coming to bank, only a few are selected in the initial pilot launch.
I remember saying that RBI will take place of banks in terms of liability. Then why do we need banks?
RBI cannot go knocking the doors of our house to distribute the E-rupee (here distribution means exchanging Rupees with E-Rupees, there’s no free lunch). That’s where banks play a role.
Imagine going at your bank to withdraw cash and they say “check your phone.. we’ve transferred to your e-rupee account”. That is this.
Eight banks have been identified for phase-wise participation in the retail pilot of the digital rupee in four cities across the country. In the first phase, four banks including State Bank of India, ICICI Bank, YES Bank, and IDFC First Bank will take part in the pilot launch. Four more banks — Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank will join this pilot subsequently.
CDBCs
There’s not just one CDBC. RBI can launch many. For now, it is targeting two: CDBC-R (Retail) and CBDC-W (Wholesale).
The Retail CDBC would be for people like us and businesses. When we transact E-Rupee, we use CDBC-R.
CDBC-W is for banks as they will be transferring huge sums.
That’s it for now.. Leave comments if you enjoyed the article. And don’t forget to ask questions if you have any.
Sayonara!
