The Case for the Digital Rupee

Last year, I wrote that China was creating a digital currency. Should India follow suit and create a digital rupee? What would be the benefits? One of Silicon Valley’s prophets, Balaji Srinivasan, wrote a great blog explaining the reasons.

 

When we hear of a digital rupee, most of us ask what it even means:

“The concept can be confusing for many people; after all, don’t they see a digital balance of rupees in their bank account already? So what would a digital rupee do anyway?”

To answer that, it helps to compare good old physical currency (paper notes and coins) with the digital balance you see when you login to your bank account.

 

You can transfer physical currency to anyone. Whereas you can transfer the digital balance you see on your bank’s website only to others with a bank account. But in countries like India, not everyone has a bank account because of (i) Lack of branches and ATM’s in remote areas, and (ii) Minimum balance requirements are too high for many. And so, unlike physical money which can be exchanged with anyone in the country, the money you see when you login to your bank account cannot be exchanged with everyone.

 

Sure, the government has always tried to force banks to operate in remote, rural areas but such coercive measures never work out well, do they? Worse, without a bank account, most people then lose out on access to digital money transfer apps like Google Pay, Phone Pe and Pay TM.

 

All this brings us to the purpose of a digital rupee. It is not money that is held in a bank. Instead, it is a software entry in a government database. Since the money is pure software, nothing physical like a branch or ATM is involved. Which in turn reduces the cost of each such “account” to practically zero, meaning everyone can have an “account” of these digital rupees. The digital rupee would be accessible and transferable via smartphones that are getting ubiquitous, thanks to aggressive moves by companies like Reliance Jio. And if financial transactions increasingly move to the electronic domain, it becomes easier to track the movement of money and progressively, as and when digital money take over, black money becomes that much harder to use.

 

A key point: the proposal is not to replace physical currency with the digital rupee. The digital rupee is in addition to physical currency. This ensures people without smartphones don’t get locked out, and it also ensures money can be used during disasters like earthquakes when phone towers may get knocked out.

 

You might think all of the above reasons and benefits hold for every poor country in Asia, Africa and South America. Does that mean all poor countries should be creating their national digital currencies? They could try, but India has other key ingredients already in place, says Srinivasan. It has a digital ID system called Aadhar, it has the India Stack layer of software deployed nationwide already, it has a “battle tested” mechanism for money transfer – the UPI, major banks already integrated with UPI, and many popular phone apps built on top of UPI (think Google Pay and Phone Pe).

 

Therefore, Srinivasan argues that India is perfectly positioned to create its digital currency in two steps: (1) Create and inject the digital rupee via the UPI layer of India Stack, and (2) Create a digital wallet linked to every Aadhar ID. Voila! The digital rupee would become operational immediately for everyone because all those apps and banks are already integrated with UPI.

 

In fact, for exactly these reasons, the RBI is already exploring the idea of issuing the digital rupee. We are certainly better positioned than everyone else on the planet to take the plunge.

 

Like I keep saying, when it comes to Internet + smartphone based systems, India (and China) are way ahead of the world.