Decoding the e-Rupee

What is digital Rupee or e-Rupee?

As the RBI explained, the e-Rupee is a form of digital token that represents legal tender. Unlike cryptocurrencies, the digital Rupee is issued in the same denominations as paper currency and coins.

How will digital Rupee work?

The RBI explained that digital Rupee or e-Rupee will be distributed through intermediaries like banks to customers and merchants. Users will be able to transact with e-Rupee through a digital wallet offered by the eligible banks and stored on mobile phones or devices.

The central bank also confirmed that the transaction in digital Rupee can happen between Person to Person (P2P) and Person to Merchant (P2M). Users will be able to make payments through e-Rupee using QR codes displayed at merchant locations, just like online transactions are done. “The e-Rupee would offer features of physical cash like trust, safety and settlement finality. As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks,” the official RBI release stated.

 If this is digital money, how will it be any different from the digital money you transact using UPI?

Right now if you must transfer money over UPI, you have to make a request and forward it to your bank. The bank then decides to deduct the balance and transfer it to the beneficiary account. In the background, banks also trigger an elaborate clearing and settlement process to make sure everybody gets paid what they’re owed and not a penny more.

So there’s a chain of intermediaries who enable this transaction.

With the digital rupee, however, you don’t need intermediaries at all. You could simply transfer digital money from your wallet to another wallet (belonging to an individual or a merchant) just as if you were handing them physical cash. The transaction is final. The settlement is final and you may not even need an internet connection.

It’s just like physical cash, only it’s entirely digitized.

But wait, how do I get my hands on e-Rupee?

Well, right now the currency will only be made available to a closed group of people in select cities. But if you were part of this lucky group, here’s how you’d go about transacting with the digital rupee.

First, you’d install the CBDC app (Central Bank backed digital currency app) and use a phone number linked to a bank account. Once you register successfully on the app, you will be assigned a digital wallet with a unique ID. You can then load the wallet by transferring money from your bank account. Now here’s where things get interesting. The app will let you pick currency in any denomination you like. So if you’re loading ₹10,000, one way you could do this is by asking — ₹500x16 units, 100x10 units and ₹50x20 units.

And once you confirm, your wallet will include digital currency in these denominations.

Okay, but what’s the point? What’s the utility here?

Alright, let’s suppose you want to transfer a large sum of money. If you’re doing it with a bank, the bank may impose restrictions on the kind of money you can dabble with each day. If you’re sending money over to a new account you may have to wait for the bank to authorize this transaction. However, if it’s “digital rupee” stored in your wallet, you should be able to transfer the money instantaneously without a hitch — at least in principle.

Having said that, it’s entirely possible that the RBI may still impose spending caps or they could offer you the option to set restrictions that suit you best. But the presumption right now is that it will offer users a higher degree of flexibility. It’s like having a boatload of cash in your cupboard. In theory, you should be able to hand it over to anybody if you so wish.

But since it's just like cash in your cupboard, only digitized, the e-Rupee will not earn any interest if it's sitting in a digital wallet. So there's that.

 Fair enough! But why is the government backing this?

Well, not just the government. But the RBI also seems to think the e-Rupee could solve some problems persistent with physical cash. Think about how hard it is to print, transport, store and distribute physical money. It’s a logistical nightmare and it is very expensive. However, if you could replace some of this cash with digital currencies, that could save a lot of money.

The flip side however is that not everyone is convinced that it’s a more affordable alternative. If you have to issue different denominations as digital tokens and process all the overhead, you could make it more complicated and thereby more expensive. So it could swing both ways.

But perhaps the biggest benefit could include a concept that the RBI hasn’t discussed just yet — “Programmable money.”

For instance, if the government is thinking of extending fertilizer subsidies to farmers they could load the wallet with pre-programmed money — e-Rupee that could only be spent on fertilizers. They could also measure the efficacy of the program at a centralized level by tracking this money and seeing where people are spending it.

Fair warning — This isn’t to say that the government will roll out such a program. But it is possible.

That sounds like a privacy nightmare?

Yes. But banks already track all digital transactions. This isn’t vastly different. In fact, if anything it seems the RBI is asking banks to not report low-value e-Rupee transactions in a bid to offer the same degree of anonymity as physical cash.

However, having said that, if we go down this route of transacting with programmable money, then it could be possible for the state to impose all kinds of restrictions, that simply wouldn’t be possible in the traditional banking ecosystem (or physical cash). That could be scary.

And if the e-Rupee comes to replace physical cash entirely, then that could be very very scary.

For now, however, the RBI has no such plans it seems. They only intend to use this as an alternative to physical cash for some use cases and we will just have to wait and see how the pilot pans out over the next few days.