What is Digital Rupee (e-RUPI)
Back in 2016 when UPI was started, there was very little adoption for this technology. Close to zero transactions were done in the first three months, but over the next three years, the technology found a massive adoption.
And right now sitting in 2022, approximately 500 crore of transaction is done every single month on UPI. UPI became such a massive story to come out of India.
That many countries, for example, uk, France, Nepal, Malaysia, they all have started to adopt UPI. So my question to you is that why do you think that UPI succeeded and became such a big game changer?
The answer there is very simple because it offered massive benefits to the end user. For example, you and I did not need to have to carry cash. We could simply transact via UPI just by using our phone. What is Digital Rupee (e-RUPI)
It was safe, secure, fast, easy to understand, easy to execute. So all these benefits led to the mass adoption of UPI. So as of December 1st, 2022, the government of India has decided to launch its own CBDC Central Bank digital currency.
It is also called as digital Rupi. So now the question comes that can Digital Rupee become the next UPI? And one of the most talked about growth story.
How exactly is it going to help customers? What is the technology behind it and why such a thing is needed in the first place? So I will help you understand the entire complicated concept.
It is going to be a slightly more advanced, complicated, but if you understand this topic, you would understand a lot about blockchain, decentralized, centralized ledgers and how CBDC fits into this entire monetary space.
So let us kickstart our discussion and I will speak in simple bullet points. So let’s first and foremost understand where CBDC fits in the monetary ecosystem. If we have to divide money, we can predominantly divide it into two parts.
First would be physical and second would be digital. Now, if you are paying legal taxes, and if you’re holding let’s say a hundred rupees of currency note, there is nothing wrong with it, it’ll be termed as wide money.
But on the flip side, if you’re converting your digital money into physical money and holding it some way or the other, that could be termed as black cash.
Now on the flip side, there is something called as digital money. A primary case in point would be the bank account money. What is Digital Rupee (e-RUPI)
For example, if you are having five LAKH rupee of cash in your HDFC or ICICI account what type of money it would be, it would be digital money that is kept into your bank account. On top of that CBDC could be considered as a digital money.
On top of that, there are different representations of money which could be considered digital in nature. For example, if you have Amazon wallet or paytm wallet and if you’re putting some money in it, that could be also considered as digital money.
Now many at times people think that UPI is also money. No UPI is not money. It is an enabler of payments. So that is what UPI does.
And what type of payments does it enables? It enable digital payments. Now an important point to understand here is that almost 92% of the money that exists in the economy is digital in format and only 8% of the money is actually hard cash.
So this is a very important point and let me come back to it, but let me quickly explain what do I mean by money sitting in our digital format and what does it look like? So most of the money that you see in India, for example, there is like a hundred trillion rupee that is flowing through the Indian economy.
Out of that a hundred trillion, 92 trillion dollar would be purely in a digital format and only 8% will be in hard cash format. What is Digital Rupee (e-RUPI)
Now, who controls those numbers? So this is what the system looks like. So the payment and settlement system in India is controlled by rbi.
Now what do I mean basically what is it that they are controlling? They are controlling something called as ledger. For example, this is the master ledger that has accounting of all the digital transactions that are being done.
Now, all the other commercial banks have their own set of ledgers. For example, HDFC will have its own ledger, ICICI, and axis bank.
All these different, different banks will have their own ledger, which is in turn connected to this master ledger, which allows rbi to monitor exactly how much money is flowing through the economy.
Now the backend mechanics is highly complicated, but I hope you got the concept of ledger that there is a master ledger and there are a set of other mini ledgers that are controlled by other banks. What is Digital Rupee (e-RUPI)
And when you combine all these ledgers, it gives rbi, a sense how much money is flowing through the economy in a digital format.
Important point to be noted that if you decide to withdraw 5,000 rupees and keep it under your mattress, you can do anything with it and it’ll become really difficult for the government to keep a track of what you are doing with that money.
And that is the precise problem that Modi ji tried to solve. But unfortunately, it did not work out and now the cash economy is back with a bank.
So this brings us to the next major point that what exactly is cbdc? So this is how CBDC has been defined. So cbdc is not a new currency, but an electronic version of sovereign currency that is rui.
Now you’ll get a little bit confused that okay, this is exactly like, like digital money only it is equivalent into the money that I’m keeping in my bank. So how is this particular currency different from whatever else money I’m having in my account?
Okay, so please hold on. I will help you understand that. Now it is further said that this bookkeeping, the ledger thing that I talked about, it can be maintained in a conventional centrally controlled database.
What is centrally controlled database? Those mini databases or the mega database that RBI maintains or through distributed ledger technology. So this is the bookkeeping process that this ledger is having.
Now, in order to understand CbdC better, you have to pay attention for the next two, three minutes because I’m going to explain you three critical definition that forms the basis of CBDC. What is Digital Rupee (e-RUPI)
The first key term that you need to understand is called as blockchain. Now, blockchain in very easy to understand words is a network that allows you to push data or transfer data from point A to point B.
Now if you see this in the money context, for example, if you’re giving your bank a command that transfer a hundred rupees from my account to let’s say Aman account who has a bank account with ICICI bank, what would happen to my account?
So HDFC bank will make a ledger entry that debit rahul hundred rupees and ICICI bank will make an entry that credit hundred rupees for aman.
So this is what the accounting entry would look like and what are we precisely doing? We are simply pushing this data and this data through a network called this RTGS, NEFT, IMPS, etc.
So a more refined definition of blockchain would be that it is actually a technology that can enable you to develop networks that allow you to push data from point A to point B. Now, monitory systems can also be developed for example CBDC.
It is being said that It is being developed on similarly Bitcoin, Ethereum are also developed on blockchain and you might have heard that these are blockchain technologies. What is Digital Rupee (e-RUPI)
So the second key thing that you need to understand is the concept of centralized ledgers and distributed ledgers. Now again, going back to that RBI example that I gave earlier. So RBI maintains a master ledger.
This is what the master ledger is. Similarly, HDFC maintains its own ledger, ICICI will maintain its own ledger and access will maintain its own ledger.
All these ledgers are then somewhat shared with RBI that does the tiny and maintains this master ledger, right? So this is how the entire mechanics operates.
In a centralized system, there is a very clear accountability as to who maintains the ledger.
For example, this master ledger is maintained by rbi. This ledger is maintained by HDFC. This ledger is maintained by access, so on and so forth. So in a centralized ledger system, there is some party that is accountable for managing that particular ledger.
But on the flip side, a distributed ledger is not maintained and controlled by any single entity. It is maintained and controlled by something called as a smart contract, which is a self-executing code.
For example, on this case, if RBI decides to share this master ledger with everyone on the internet, then you and I can also go and access this master ledger.
Whatever changes are being made on this master ledger, it gets reflected across all our computer nodes. So that is what a distributed ledger would mean.
For example, Ethereum is a distributed ledger and let me take you to Ethereum’s blockchain. What is Digital Rupee (e-RUPI)
And here is a website, it is called Etherscan.io and here you can see all the latest transactions that are happening on Ethereum. For example, this is the wallet address from which some amount of Ethereum 0.15 Ethereum has moved.
Similarly, you can keep on scanning it and you and I, anyone can access this particular blockchain network, but no such functionality has been built on RBI and therefore RBI is a centralized ledger already and the CBDC that is going to come will also be a centralized ledger.
UPI Vs CBDC
So now comes the natural question that what is the the difference between making a payment via UPI versus making a payment via CBDC? So right now the system is that RBI issues hundred rupees.
It could be in a physical format, it could be in a digital format. This goes into your account.
So you’re holding hundred rupees, let’s say in HDFC bank. Now you want to buy an ice cream from a merchant.
Now that merchant has a bank account with ICICI. So when you pay this a hundred rupees to the merchant via Google Pay, then which banks are involved here? HDFC bank is involved and ICICI bank is involved in terms of enabling that UPI transaction to transfer a hundred rupees from you to the merchant’s account, which exists with ICICI bank.
So this mechanics requires the involvement of commercial banks, but on the flip side, CBDC does not require such a mechanism here, the RBI is directly giving you something called a CBDC, and you can go and make a purchase with a merchant.
So from a functionality point of view, there is a zero difference between this mechanism and this mechanism. What is Digital Rupee (e-RUPI)
So then comes the natural question, then why is it that the government is spending CROs and CROs of repeat in terms of building this CBDC technology? There must be something good with this. Okay? So to help you understand this better and factually, let me take you to RBI’s concept note on this particular topic.
So this is what the RBI says, and I’ve taken this directly from RBI’s website. You two can go and read it. So they say that e-RUPI will provide an additional option to the currency available forms of money.
It is substantially not different from bank notes, but being digital it is likely to be easier, faster, and cheaper. It also has all the transactional benefits of other forms of digital money.
Now to further validate this point, read the entire concept paper and witness this line.
The key motivators for exploring the issuance of CBDC in India among other include reduction in operational cost involved in physical cash management.
Now, I do not want to cast aspersions, but this is not completely correct because as per the previous data that I had shown you, almost 92% of money is digital government will not save any cost in form of money printing because that is physical form of money printing on which cost has incurred.
Since CBDC is digital in nature, there is hardly any cost benefit that is coming. Now, one counter-argument could be that you know what? Managing all those ledgers that you are earlier speaking about that HDFC, ICICI, and KOTAK all will have to manage their own individual ledgers, then RBI’s main ledger and then all the mechanisms of reconciling all these books.
That might require a lot of cost. Yes, agreed completely. But what simply CBD C is doing is that it is taking power away from these commercial banks and investing more power with RBI , which is indirectly controlled by the government.
Now, another key point that has been expressed in support of CBDC is that it’ll improve direct benefit transfer. What is Digital Rupee (e-RUPI)
Now what is the meaning of direct benefit transfer? For example, you might have seen that there are a lot of people who live below poverty line, they require RAASAN So the government, what it does is that it transfer money directly into their bank account.
Now, the government is saying that we will come out with a voucher system called e-RUPI.
So this is what they will come up with and we will send it directly to the phones of the customers and they can go and avail credit or whatever benefit has been assigned to them.
Now, this sounds great in theory, but here is the counter-argument. This is a statement by Mr. Piyush goyal himself that right now direct benefit transfers are doing wonderfully well and there has been almost an 88% adoption of FinTech in India.
This is an official statement given by a sitting minister. A lot of money has already been spent in form of Jam Trinity, which is jan Adhar and Mobile. A lot of bank accounts have already been opened.
If this system had to be instituted and you have already spent crazy amount of money building the Jan Dhan, addhar Mobile thing and all of us have gotten our aadhar card created, etc, then what was the point of building this entire jam system in the first place, which is almost at completion and now we are trying to move to another system. What is Digital Rupee (e-RUPI)
So to cut the long story short, according to me there is no real benefit of CBDC. Now you might say, what? Cbdc are being introduced by Chinese government.
There is a surveillance system in China, and what you would notice is that the Chinese government has installed approximately 20 crore cameras all across China.
They can survey every single citizen. They have justified the use of this surveillance system saying that it enables us to deal with terrorism theft, all this stretchy that that is going across the society.
But there was a data leak that categorically pointed out that the Chinese government was using this surveillance system to crush a minority community called as vigor.
So for them, their CBDC allows their government to exert more control. So now let me finally talk about the disadvantages of CBDC number one, as what the Chinese government can do. Any other government can do the same.
It gives central government more control by taking away control from intermediary bank. The more the centralization or power vested with fewer politicians, the more it can harm the general populace. What is Digital Rupee (e-RUPI)
So this is problem number one. Problem number two is in the design of CBDC itself, that it does not allow you to pay interest.
So if you go and get a cbdc, you are not going to get any interest on it. So it is better to just keep your digital money in the bank and use it via that channel. At least you are making some interest income.
Now, third and final criticism comes from Dr. Rajan He was the one who played a pivotal role in the adoption of UPI payments in India also. So we have to give him credit and listen to his commentary carefully.
So this is what he says, that the problem with central bank digital currency is that it is not well designed, is that it hovers up all the data and essentially provides competition to even traditional private sector activities.
Think about it this way, that if you are directly taking money from Central Bank, not taking it through hdfc, then what are you doing?
You are hurting the credit lending process in the economy. Commercial banks play a very important role that they check the type of people they are giving loans too. There has been massive problem in terms of giving public debt.
You can tell me the bank’s name names, who has Nirav Modi taken loan from? Again, you can let me know their names. The point I’m trying to prove is that the public sector banks are controlled by whom.
They’re controlled by the government. They do not make efficient lending decisions with private sector banks. So if you’re taking more credit lending power away from private banks, it can cause a disruption in the economy.
In China’s case, it is a very different system why they want to control the economy. It’s a centralized economy That economy works great for them.
But if we convert Indian economy into a centralized system, it can create a lot more negative impact. So in summary, CBDC does not have any real advantage.
Even the government is struggling in terms of communicating what the key advantage is If you understand, I’m very happy to hear the other side of the argument. What is Digital Rupee (e-RUPI)
Please drop in the comment and let me know what exactly do you see the benefits of CBDC. But as of now, there are none. There are more risks compared to advantages in terms of introduction of CBDC.