While enjoying the look, feel, and touch of cash is part of its ethos, India is nevertheless on the road to currency digitization. The Reserve Bank of India is scheduled to introduce a digital currency sometime before March 2023, which is the end of the current financial year. Currently, that currency does not have a name, but its purpose is to provide almost all the features that now come with cash, albeit being in a digital mode. Today, digital transactions leave an audit trail and a trace. Information about identity, purchases, and location is known every time a debit or credit card is swiped. Another difference between a cash transaction and a digital one currently is that with cash, settlement happens at the time of the transaction. In other words, it is a “delivery versus-payment” arrangement. In today’s digital transactions, however, payments are made at the time of settlement, which occurs with a time lag after the transaction. The preference for a delivery versus-payment situation in which the buyer doesn’t part with the payment until there is the assurance of delivery is perhaps one of the strong motivators for people to still like using cash. Of course, continuing to have physical, paper-based currency in circulation at the same time that a digital currency is in use doesn’t quite gel with most visions of the future. That is why the Reserve Bank’s upcoming digital currency is so important and so different. First, central bank digital currency (CBDC) will be different from Bitcoin, Ethereum, and other cryptocurrencies, which are not actually equivalent to sovereign currencies in most countries, including India, because they are not authorized means of payment and do not have a legal backing. A central bank digital currency can be used to offset payment obligations with certainty, which a private digital currency cannot achieve. Second, there is no clarity on either ownership or quantum of private digital currencies (assets?) in circulation. There are only guesses as to the creator of Bitcoin, Ethereum, Ripple and others. As a result, there is no guarantee that the value stored in the form of a private digital currency will necessarily be paid and that it is a stable value at all times. Contrast that with a digital currency from a central bank, which typically is backed by a sovereign nation. Even if something were to go wrong — say, in the IT system, or some other unforeseen contingency — the holder of that bank’s currency, whether in physical or digital form, has confidence that the value of that currency will be available to him at all times. The Reserve Bank of India has not yet defined the term “cryptocurrency,” but I believe it will define today’s private cryptocurrencies as an asset similar to a share of stock. The definition also would cover new crypto products such as nonfungible tokens. In recent years, India’s retail payments system has grown more sophisticated, more dynamic, and much larger. The broad payment space includes several payment system operators, wallet companies, and the providers to operators and card companies. These companies have grown more profitable as customers enjoy more choice. The Reserve Bank has helped the industry grow through its Real Time Gross Settlement system, which ensures funds transfers within seconds for large values, and its National Electronic Funds Transfer system, for retail transfers. Then there is UPI, the Unified Payments Interface, which is an instant real-time payment system that facilitates interbank peer-to-peer and person-tomerchant transactions. The QR-code-based system was developed by the National Payments Corporation of India, the umbrella organization for operating retail payments and settlement systems created by the Reserve Bank of India and the Indian Banks’ Association. Depending on a transaction’s purpose, funds can move digitally in many ways now in India. In fact, one of the most exciting aspects of the digitization of the payment system and the coming of true digital currency is that the faster flow of money, which digitization encourages, is very positive for the Indian economy. The speed with which money turns over in the economy, or its velocity, is a measure of an economy’s dynamism. The greater the velocity, the greater the economic growth. If India’s goal is to become a superpower with a large GDP, the faster the movement of money the better, and if speed is the goal, digitization is the route. Newer digital forms that are safe, secure, convenient, and easy to use will power India into the future. The coming digital currency from India’s central bank will be a major step in that direction.
Ganesh Kumar was formerly Executive Director of the Reserve Bank of India.
