It is high time the Reserve Bank of India (RBI) and the government got around to making greater use of India’s central bank digital currency (CBDC), the e-rupee. Capital flows in and out of securities markets, whether from or to external jurisdictions, would become instantaneous if these make use of e-rupee wallets—enabling wide compliance with the mandated speed of settlement, post transaction.
Right now, one hitch in expanding the e-rupee’s retail use is the ubiquity of digital payments done via the Unified Payments Interface (UPI). Recently, the number of daily UPI transactions exceeded 700 million. When we have UPI, why do we need an e-rupee?
This platform transfers funds from one bank account to another instantly, which suits users who routinely access funds in their own accounts online, but not everyone. For India’s vast migrant population, hailing from remote corners of the country where bank branches and automated cash dispensers are a rarity, UPI transfers are not enough.
For them, e-rupee wallets in the hands—or rather, phones—of family members offer a cheap, quick and secure way to remit funds back home. Notably, welfare transfers could also be done this way.
Delays in reaching the nearest cash dispenser, difficulty in using one and the risk of finding a machine out of notes to dispense—all such problems are overcome if money comes into a CBDC wallet in a handheld device. From this, payments could be made to bank accounts or other wallets, including ones that change e-rupees into paper cash. Government transfers to such wallets, meanwhile, would do away with middlemen.
In other words, India’s CBDC can subserve financial inclusion in ways that UPI cannot. As the e-rupee exists on a blockchain, a distributed ledger, it allows transactions to be traced. While this raises privacy concerns, it also offers an advantage in cases where authorities have a legitimate reason to track flows, such as benefit transfers for specific purposes and indirect tax payments.
For taxation, especially, traceability is desirable. Input tax credit fraud in GST over the last five years has been estimated at almost ₹1.8 trillion. Were all GST payments to be made with the e-rupee, such fraud would likely vanish. Since the destination of despatched goods—complete with details of their value, tax paid and consignee—would be available on the online ledger, there would be no need for e-way bills and physical stoppage of haulage for inspection.
Given how CBDC technology permits ‘programmed’ or preset flows of money, it could ease tax compliance on the whole. And, as the long history of money has shown, tax mop-ups in a particular currency are an effective way to promote its wider use.
We also have compelling reasons to use the e-rupee for cross-border flows—such as speed, security and cost savings. India is the world’s largest recipient of remittances. From many countries, money can be sent easily, but not from all. The use of e-rupee wallets at both ends, with spot conversions, would make such transfers simple. Moreover, the US dollar’s status as the global anchor currency may not last forever. Should an alternative arise, perhaps in the form of a stablecoin pegged to a basket of currencies, the e-rupee must be ready to integrate with such a blockchain.
What a CBDC in economy-wide use could imply for banking, both central and otherwise, needs some discussion. But if we get its privacy settings right, its tech enablers suggest it’s the future of money. Let’s stay at the front edge of its evolution.