e-Rupee: An Idea Whose Time Has Come?

The RBI refuses to classify cryptocurrency as an asset since it doesn't have future cash flow and its value is always fluctuating because of speculation.
There is also no consumer protection, observes Tamal Bandyopadhyay, and hence the e-Rupee trial run.

On November 1, India joined the league of 50 countries that are in an advanced stage of exploring digital currency -- either in the process of developing it or ready to launch pilot projects or have already launched it.

The Reserve Bank of India kicked off the first pilot project of the central bank digital currency (CBDC), or e-rupee, for the wholesale segment with secondary market trades in government bonds.

On Day 1, nine banks were involved in buying and selling bonds worth Rs 275 crore (Rs 2.75 billion) in the secondary market using CBDC.

The overall trading volume was Rs 20,865 crore (Rs 208.65 billion) on that day.

Indeed, a miniscule portion of the trade was carried in digital currency, but it's just the beginning.

The RBI is ready to follow it up with a pilot for retail customers this month itself.

Going by the American think0tank in international affairs, Atlantic Council's CBDC tracker, at least 105 countries, representing over 95 per cent of global GDP, are at the moment exploring CBDC.

Just about two-and-a-half years ago, in May 2020 (around the time the Covid pandemic hit the world), only 35 nations were into it.

Jamaica is the latest country to launch a CBDC -- the JAM-DEX. With it, at least 10 countries have fully launched a digital currency and China's pilot project is expected to expand in 2023.

China has claimed success with its first pilot project of digital yuan currency.

In early May 2021, around 181,000 consumers were given 55 yuan free in digital wallets to spend at the Double Five shopping festival in Suzhou city near Shanghai in eastern China.

Since then, it has been ramping up the pilot projects, particularly for retail payments.

Among the G7 economies, the US and UK are the laggards even as 19 of the G20 countries are exploring a CBDC.

Of the 19, 16 including South Korea, Japan and Russia have made significant progress over the past six months. The list includes India.

At least two internal committees of the Indian central bank have worked on CBDCs and a concept note has recently been released.

The CBDC in India will be used both for retail as well as wholesale payments.

The use of CBDCs for wholesale payments is easier as all interbank transactions are already digital and there is no use of cash.

Only when an individual uses CBDCs for buying sundry stuff, the purpose of supplementing cash will be achieved.

Like credit card, Internet banking and wallets, the CBDCs will be part of the payments system -- just another way of paying for goods and services through a wallet.

There are many such wallets operating in the Indian financial system.

The CBDC will be one of them with a difference -- it will be issued by the nation’s central bank, and distributed and managed by commercial banks.

The RBI is likely to follow a centrally controlled database as distributed ledger technology may not be able to handle the scale of the Indian population.

Will CBDC usher in a cashless system? That's unlikely even in the distant future. In fact, no nation in the world at this point is cashless.

Although it was the first country in Europe to issue banknotes, Sweden is the most cashless society in the world today -- more than 98 per cent of its citizens own a debit/credit card.

Some studies suggest that physical cash could be eradicated from its economy by 2024.

According to a World Bank report, 98 per cent of the citizens of Norway use debit/credit cards, giving tough competition to Sweden to become the first cashless country in Europe.

Among others, 91 per cent of the population of Holland has embraced digital payments and debit cards; and Finland, which has a population of around 5.5 million, is predicted to become completely cashless by 2030. It is just behind Ireland in terms of frequency of use of cards.

China, South Korea, the United Kingdom, Australia, the Netherlands and Canada are also en route to a cashless economy.

South Korea is currently more cashless than China, the biggest e-commerce market in the world, but it's a much smaller country.

One of the benefits for the central bank will be the decline in the cost of printing money, distribution and mopping up soiled notes.

How significant is that? Let's take a look at how much the RBI spends on printing money.

According to data The Hindu BusinessLine sourced through Right to Information from the Bharatiya Reserve Bank Note Mudran Ltd, an RBI subsidiary that prints currency, the selling price for Rs 10 denomination notes was Rs 960 for 1,000 pieces in FY2022, making the cost of one Rs 10 note 96 paise.

The cost per piece of Rs 20 note was just 1 paisa lower, 95 paise.

For a Rs 50 currency note, the cost was Rs 1.13; for a Rs 100 note, Rs 1.77; Rs 200 note Rs 2.37; and Rs 500 note Rs 2.29.

In FY2022, the price of Rs 50 saw a rise of 23 per cent over FY2021 (from 92 paise to Rs 1.13), while that of a Rs 20 note was just 1 paisa.

There was no increase in the cost of printing Rs 500 notes during this period.

Overall, the RBI spent Rs 4,984.8 crore (Rs 49.848 billion) for printing currency notes in FY2022 -- 24 per cent more than it did in FY2021 (Rs 4,012.09 crore/Rs 40.12 billion) -- even though the supply of notes was lower.

Incidentally, the central bank had spent Rs 7,965 crore (Rs 79.65 billion) to print new currency notes in FY2017 (the year of demonetisation) -- 133 per cent higher than the Rs 3,421 crore (Rs 34.21 billion) spent in the previous year.

Till last year, the RBI was following the July-June financial year for accounting purposes.

One of the factors that has led the RBI to push for CBDC is its allergy to cryptocurrencies.

There are many reasons behind that. For instance, they can't be slotted.

They are neither a commodity nor a currency, nor part of the payments system.

Since they are not issued by central banks, such currencies do not have sovereign backing.

Moreover, as the transactions are anonymous, cryptocurrencies cannot be subjected to public scrutiny.

This has serious implications for KYC norms and is fraught with risks of money laundering and terror financing.

The RBI refuses to classify a cryptocurrency as an asset since it doesn’t have future cash flow and its value is always fluctuating because of speculation. There is also no consumer protection.

The CBDC will also pare the cost of remittances as cross-border transactions will turn cheaper.

Going by a World Bank report, India was the largest recipient of remittances in 2021.

As of June 2022, there were nine cross-border wholesale CBDC pilot projects and three for retail transactions.

A recent Reuters report talks about China's push for digital yuan in the world's largest cross-border CBDC pilot.

A six-week test between August 15 and September 23 is part of mBridge -- a project that pilots cross-border payments in digital currencies issued by the central banks of China, Hong Kong, Thailand and the United Arab Emirates.

As geopolitical tensions rise, efforts for globalisation of CBDC take centre stage. But the Atlantic Council warns that the financial system may face a significant interoperability problem in the near future and calls for international standard setting to tackle the proliferation of different CBDC models.

Tamal Bandyopadhyay, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.

Feature Presentation: Rajesh Alva/Rediff.com