Interest in digital currencies has been growing for some time. For example, the RBI recently wrote an essay on this topic and developed some interesting use cases. It is hard to say with certainty what the Indian version of a digital currency will look like, but one could venture a guess at some of the attributes with which it might boast.
When you transfer money to UPI, make an application and ask your bank to do so. The bank decides whether to deduct the balance and transfer it to the beneficiaries account.
This is too simplistic a representation of the settlement and settlement process, but it highlights our payment infrastructure and does a good job of explaining the role banks play in facilitating payments. Banks are very important to our cause.
With digital currency, you don’t need a bank. In fact, you can transfer money between accounts without using an intermediary. Unlike paper bills (imagine a UPI system with the CBDC [Central Bank of India], where digital currencies are settled without bank deposits or cash), the need for interbank settlement disappears.
The downside is that it becomes harder to get the money back. You have to convince someone to return it and you cannot rely on the bank to reverse the transfer. It’s like paying someone with cash. Digital currency is no different. On the other hand, digital currency is seen as a better alternative to physical cash.
Consider how difficult it is to print, transport, store and distribute physical money. It’s a logistical nightmare and expensive. Replacing physical money with digital money saves a lot of money. You also have the option of programming the digital money. So it is much easier to introduce digital currency into the economy, and it is therefore in the interest of RBIs to promote it.
The last time we spoke, we discussed the introduction of the digital yuan. At the time, we spoke about how the money was programable itself, how China was testing expiration dates to encourage users to spend the money to promote economic growth and how it intended to track the currency’s flow.
If you want to measure the effectiveness of a program, you can track the money and see how people spend it. If you are thinking of extending them to farmers so that they can buy fertilizer, you could program them so that the money can be used to buy fertilizer.
That is one of the possibilities. If you are wondering about the timing, the paper clears up a little. This does not mean that India’s digital currency will be designed in this way.
The introduction of private virtual currencies (VCs) is another reason why CBDCs have become necessary. They do not believe that Bitcoin or Dogecoin will come and replace the rupee as an actual exchange medium or that they will pose a threat to the national currency.
However, once VCs are recognized as national currencies, limited convertibility is likely to be at risk. It is not clear what specific needs are met by VCs that cannot be met with official funds, but which in themselves do not stand in the way of their adoption.
The RBI, it seems, is working on introducing a new digital currency for the central bank, but we will have to wait and see how that plays out. If the central bank sees a way to dissuade people from buying cryptocurrencies, that is a vision, but many would argue that it is wishful thinking. The RBI is certainly on the right track here.