While enjoying the look, feel, and touch of cash is part of the Indian ethos, the country is moving towards currency digitization. The Reserve Bank of India plans to launch a digital currency before the end of the current fiscal year in March 2023. That currency still needs a name, but its purpose is to provide almost all of the features that cash now has, albeit in a digital form.
Digital transactions nowadays leave an audit trail and a trace. Every time a debit or credit card is swiped, information about the cardholder’s identity, purchases, and location is revealed. Another distinction between cash and digital transactions is that with cash, settlement occurs at the time of the transaction. It is, in other words, a “delivery-versus-payment” arrangement. Payments are made in today’s digital transactions, however, at the time of settlement, which occurs with a time lag after the transaction. One of the strongest motivators for people to continue using cash is the preference for a delivery-versus-payment situation in which the buyer only parts with the payment once there is the assurance of delivery.
Of course, continuing to have physical, paper-based currency in circulation while a digital currency is in use does not fit with most future visions. That is why the Reserve Bank’s upcoming digital currency is both significant and unique.
Private Crypto Is Not Digital Currency
To begin, central bank digital currency (CBDC) will differ from Bitcoin, Ethereum, and other cryptocurrencies, which are not equivalent to sovereign currencies in most countries, including India, because they are not authorized means of payment and lack legal backing. Unlike a private digital currency, a central bank digital currency can be used to offset payment obligations with certainty.
Second, there is no agreement on who owns or how many private digital currencies (assets?) are in circulation. The origins of Bitcoin, Ethereum, Ripple, and other cryptocurrencies are unknown. As a result, there is no guarantee that the value stored in a private digital currency will be paid and will always be a stable value. In contrast, a digital currency issued by a central bank is typically backed by a sovereign nation. Even if something goes wrong — say, in the IT system or some other unforeseeable contingency — the holder of that bank’s currency, whether in physical or digital form, has confidence that the value of that currency will always be available to him/her.
The Reserve Bank of India has not yet defined the term “cryptocurrency,” but I believe it will describe today’s private cryptocurrencies as shares of stock. The definition would also include new crypto products like nonfungible tokens.
India’s Retail Payments
India’s retail payments system has become more sophisticated, dynamic, and extensive in recent years. The broad payment space includes several payment system operators, wallet companies, and providers to operators and card companies. As customers have more options, these businesses have become more profitable.
The Reserve Bank has aided the industry’s growth with its Real Time Gross Settlement system, which ensures funds transfers for large amounts within seconds, and its National Electronic Funds Transfer system, which is used for retail transfers. Then there’s UPI, or the Unified Payments Interface, a real-time payment system that allows interbank peer-to-peer and person-to-merchant transactions. The National Payments Corporation of India created the QR-code-based system, an umbrella organization created by the RBI & the Indian Banks’ Association to operate retail payments and settlement systems.
The Money’s Velocity
Depending on the purpose of the transaction, funds can now be moved digitally in various ways in India. Indeed, one of the most exciting aspects of the digitization of the payment system and the advent of actual digital currency is the faster flow of money that digitization encourages, which is very beneficial to the Indian economy. The velocity of money in the economy, or the rate at which it circulates, is a measure of an economy’s dynamism. The higher the speed, the faster the economy grows.
