Digitisation of the Indian Rupee

[CASeetharaman KC]

Up until now , the digital world has not affected the  banking business in India but with the Reserve Bank getting ready for the digitisation of the Rupee, this move could perhaps be history in the making where such a bold move has been put forth by the Honourable Finance Minister today. This move could also be a loud and clear answer to the increasing threat being posed by crypto currencies.

In the West, even today, players such as PayPal still rely on customers linking the service to their bank debit and credit cards. A few online-only banks have come up and thrived till now, such as Chime and Nubank,. The  Chinese financial sector however, has seen more intense activity which has thrown the spanner in the works, with the emergence of Alibaba’s Ant Financial and Tencent’s WeBank in China where the digitisation of their currency has taken wings slowly but surely. In fact this could be the precise reason for the Bitcoin and all other mined crypto currencies not finding much ground in China.

 Actually the pressure  for more radical change is coming from China, whose central bank has already been running an experiment with a form of cash called Central Bank Digital Currency (CBDC), which is being envisaged as the cash of the future, ultimately eliminating the need for paper money.

In a CBDC world, the digital code for each virtual currency unit will be held in a digital wallet and transferred seamlessly by the wallet-holder to other people’s digital wallets, very much as we see with today’s digital wallets like GooglePay, PhonePe, AmazonPay etc and the wallets offered by most of the existing banks in India. 

In China, the plan is that these payment services will be handled by four state banks and three telecommunications companies, who will act as wallet distributors rather than cash depositories. Users will scan barcodes on their phones to make in-store payments or send money to other mobile wallets.  The People’s Bank of China (PBOC) will periodically receive copies of customer transactions, stored on a mixed central and blockchain database.

The Chinese Central Bank did this to try and restrict the monopoly of wallets like Alipay and WeChat.  The Chinese pilot project began with the distribution of 100 million digital Yuan through lotteries in nine cities, including Shenzhen, Suzhou, Chengdu, Xiong’an, and the 2022 Winter Olympics Office Area in Beijing. The plan is that E-Yuan would be rolled out during the Winter Olympics in February 2022, and if bilateral agreements with foreign monetary authorities are reached, tourists and business travellers in China will be able to obtain a Chinese e-wallet on their own phones.

The Chinese probably decided to introduce a CBDC to reduce the country’s dependence on Alipay and WeChat, which currently account for 94% of online transactions which is of the value of nearly 16 trillion US Dollars.  This move has also reduced the threat from independent digital currencies such as Bitcoin

But then China is not the only the only country interested in CBDCs:  Sweden, Singapore, and South Korea are among 13 other countries testing pilots.

The US is also following suit; the Federal Reserve Bank at Boston, in collaboration with MIT, is currently designing a CBDC prototype.  The US really faces a threat now with the possibility of its Dollar being side-lined by other digital currencies which other countries may come up with especially the Digitised Chinese Yuan. Moreover, the technology underlying CBDCs is the Blockchain, the very technology that enables Bitcoin, Dogecoin etc

Given this background of infancy of digitised currencies the world over, today’s announcement by the Honourable Finance Minister regarding the issue of Digitised Rupee by the Reserve Bank of India is surely very ambitious. Only time will tell how the complete story will eventually unfold.