Introduction of an e-rupee

(Mains GS3 : Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development & Achievements of Indians in Science & Technology; Indigenization of Technology and Developing New Technology.)

Context:

• The Reserve Bank of India launched the digital rupee on a pilot basis. The digital currency will be offered by a select group of public and private banks in a few major cities initially, which can be used for both person-to-person and person-to-merchant transactions.

About digital rupee:

• The digital rupee, or the e-rupee, is a central bank digital currency issued by the RBI. It is similar to the physical cash that you hold in your wallet except that the e-rupee is held electronically in a digital wallet overseen by the RBI. 
• The digital rupee is recognised as legal tender by the RBI, and thus has to be accepted by everyone in the country as a medium of exchange. 
• It is, however, different from deposits that you hold in a bank. Unlike deposits which are paid interest, the digital rupees in your wallet are not paid any interest by the central bank. 
• Deposits held in banks can be converted into digital rupees and vice-versa.

Different from cryptocurrencies:

• Due to their largely unregulated nature, private cryptocurrencies do not meet several criteria for Anti Money Laundering/Combatting the Financing of Terrorism (AML/CFT).
• Additionally, holders of private cryptocurrency cannot access central banks as a lender of last resort, which greatly accentuates currency and transaction risk.
• There is also a risk of a run on certain stablecoins that are backed by non-cash-equivalent assets that are perceived as a threat to a sovereign currency and a central bank’s ability to control and dictate monetary policy.

Need for the digital rupee:

• The RBI believes that the digital rupee will make the rupee more attractive as a currency to users when compared to cryptocurrencies. 
• Cryptocurrencies have been viewed by many investors as alternatives to fiat currencies which progressively lose value over time due to debasement by central banks. 
• Since such a trend could threaten their sovereignty, central banks have been trying to come up with their own digital currencies. 
• The RBI also believes that the digital rupee will be easier and more economical to produce when compared to physical cash notes. 
• More importantly, transactions carried out using digital rupees, in contrast to physical transactions, are more easily traceable by authorities.

Worries associated:

• The introduction of central bank digital currencies internationally has worried many who believe that it could disrupt the banking system. 
• When interest rates offered by banks are low, people may be more prone to converting their bank deposits into digital currencies since they would not lose out much in the way of interest income by making the shift. 
• Such an event could cause the cash holdings of banks to drop and hinder banks’ capacity to create loans. 
• It should be noted that the ability of banks to create loans is influenced by the amount of cash they hold in their vaults because the cash position of a bank determines its ability to expand its loan book while keeping the risk of a bank run under control.  

Conclusion:

• Due to India’s inherent market intricacies and socio-economic conditions, all stakeholders must consider the advantages and disadvantages of the new digital currency.
• Thus, by leveraging the latest technology, central banks can safeguard the finality of transactions, like physical cash and unlike stablecoins or any private cryptocurrency.