Digital transformation in finance is not just a buzzword. It is real. First, you learnt to make electronic fund transfers through online banking. Then came digital wallets and mobile banking transactions. You are now a pro in paying people using a QR Code or a mere phone number through the Unified Payment Interface (UPI).
The term ‘change’ ironically has changed forever. You no longer have to run around to exchange high-value currency notes into smaller denominations. Your local vegetable and fruit seller accept money on the phone.
Despite the digital revolution sweeping the money market, the RBI has sleepless nights about how people use money. “India has a unique case where the cash in the economy has shot up despite rapid digitisation in the payments space,” said a new concept note of the RBI on central bank digital currency or CBDC released last week.
“The growing use of an electronic payment medium has not yet resulted in a reduction in the demand for cash,” it observed. An RBI survey in six cities before the COVID-19 pandemic revealed that people preferred cash for small denomination payments.
The argument is that there is anonymity or privacy about cash transactions. Financial inclusion is a rapidly expanding theme in Indian finance. The dramatic surge in the use of smartphones for all financial transactions, from investment to money transfer to insurance, shows the convenience of use.
The banking system is a core enabler in the mobile money transfer ecosystem. There is a cost associated with maintaining the ecosystem. At the same time, you want financial inclusion to reach out to those who do not own smartphones or have access to the internet.
A CBDC could be one way to expand its reach by creating another cash alternative. The ‘eR’ will provide an additional option to the currently available forms of money. RBI argues in the note that it is similar to banknotes, but digital is likely to be easier, faster and cheaper.
“It also has all the transactional benefits of other forms of digital money,” the RBI report says. The other aspect is that digital currency is expected to clamp down on misuses like money laundering, counterfeiting, terrorism financing and other things. Another critical factor is the cost of printing and managing the currency. The government spent R4,984 crore in 2021-22 on the security printing of currency notes.
That does not include the damage caused by using high-quality paper and the risk borne by you, businesses, banks and the RBI. A digital currency will eliminate the cost of printing, storage, transportation, replacement and the other cost associated with delays in reconciliation and settlement over the long term.
Cryptocurrencies triggered an intense debate among governments and central bankers as many people began trading or holding them. The total value of crypto assets is over $3 trillion, as much as India’s GDP. While crypto assets have anonymity and no regulation, the resistance shown by governments to freely allow their conversion into local currencies could hamper their use in the future.
A digital currency backed by the government can be an alternative to crypto assets. It could lead to innovation in token-based ownership of assets. With a digital rupee, you could pay for a slice of the most expensive painting in the world or own a piece of land or property in a high-value real estate market.
A paper by the International Monetary Fund IMF also highlights a few downsides to digital currencies.
While central banks and governments could continue to hold sway by issuing digital currency, they could lose control over their ability to tackle inflation by manipulating interest rates.
It is anticipated that people will own digital currency instead of putting money in bank deposits. That would trigger competition to attract more deposits among banks. They would hike interest rates without any need to do so from a monetary policy standpoint. That could destabilise credit markets. If approved and implemented, a digital currency will create a revolution in ways we cannot imagine today.
(The author is editor-in-chief at www.moneyminute.in)