With a vision to place India on the digital India landscape, the country is beginning to understand transformative agenda like demonetisation by the government. Digital transactions have soared with Net banking, credit cards, digital wallets, payment gateways, Aadhaar pay, PPI, UPI, payments bank and BHIM since demonetisation.
These are radical initiatives that used technology to ensure wider acceptance. But such formats come with their own limitations and security concerns. In India, where more than 95% transactions are cash-driven, the rural and semi-urban populations have not had complete inclusion in this financial methodology. Hence, it is imperative to introduce digital fiat currency as part of the remonetisation of the economy for monetary sovereignty and policy effectiveness.
The digital fiat currency, which we have proposed to the government, works in the same way as do notes and coins. By virtue of its digital nature, it has the potential to be the most financially inclusive instrument.
Any person in India can hold it, transfer it and use it to settle debts, be it a farmer living in Gahmar village in U.P. or a salaried individual in Mumbai, with or without a bank account.
Anonymous users
The validity of paper notes and coins is independent of the holder. The two persons transacting do not need to know each other’s names nor an ID because the trust is built into the payment instrument. The transaction is final as soon as cash changes hands. There is no need for subsequent settlement between banks.
It is our proposal that the government issue a digital fiat currency, titled digital India Rupee, which would bear the same characteristics as does the cash Rupee. It would be legal tender and accepted throughout India. It would be backed by the Government. The amount of digital India Rupee in circulation would be controlled as are notes and coins today in circulation. It would be used by and exchanged between any digital payment schemes and would have full interoperability. It would have two additional advantages over paper notes and coins. It would transcend time and space, i.e. it could be transacted remotely between two parties. And, it would be counterfeit-proof! First, the advanced technology would prevent any fraud. Also, any counterfeit with a single rupee could be detected immediately without hurting circulation.
The digital currency would bring more innovation, competition, better consumer protection, more consumer choices, more open access and better regulatory transparency. It would create a ‘firewall’ between banking and digital payment systems, protecting bank accounts and information on digital systems.
Since digital India Rupee would be a centrally-issued sovereign currency, it would possess immense trust, security and control. It would also bring transparency on black money, tax evasion and other illicit activities under the legal framework. Also, with the negligible logistics costs and benefits of riding on existing infrastructure, the cost of digital India Rupee would be marginal.
India’s cash-to-GDP ratio is 12.04%. The transition from physical notes and coins to a digital currency could drastically bring this down at par with the rest of the world. Other countries have explored this for their national digital vision. Even Sweden, that sees low cash usage, is debating issuance of a digital currency and is eyeing a decision on its ‘ekrona’ in the next two years.
(The writer is the former head of Credit Suisse India and Lehman Brothers India)
