Blockchain-based “Digital Rupee” — Is RBI Overburdened?

A “ Digital Rupee” refers to “Central Bank Digital Currency” (CBDC) to be introduced and regulated by RBI in 2022–23. This for sure, is not a bitcoin or cryptocurrency which is highly volatile, pseudonymous, and not backed by any sovereign authority, which makes them susceptible to illicit activities and consumer protection risks. The digital rupee — on the other hand, is regulated by RBI and has consumer protection.

Difference between currency notes, cryptocurrency, and digital rupee

Digital Rupee is intended to reduced cash circulation in the Indian economy, RBI is responsible and has complete authority to print, circulate and transact cash in India. Despite demonetization(2016) and GST(2017), the usage of cash in circulation has not gone down but instead is increasing at a compounded annual growth rate (CAGR) of 10.2% between 2018–19 (RBI circular 2019). This reflects in the Indian GDP. This means cash is still the preferred payment instrument in India. Other countries which face similar issues are Swizz and Japan.

Now the challenge RBI faces are — whether to use the digital rupee as a substitute for cash or as a compliment?. Because the CBDC will have a decline in cash transactions, that will impact a decline in Indian GDP. In that case, RBI has to provide easy access to digital rupees to vulnerable sections or financially excluded or underserved segments of the population. While access to the internet itself is still a big challenge in India — will the digital rupee be accessible to vulnerable populations is another big question to address.

One more challenge — Next to China, India has the highest nonbanking population. GoI along with RBI tries various measures, such as direct benefit transfer in social welfare schemes. For example, 34.1 Cr bank account has been opened for the Pradhan Mantri Jan Dhan Yojana scheme, however half of them remain inactive (Global Findex Database Report,2019). This means people use bank accounts only to receive benefits from govt, but transactions happen in cash.

Considering these limitations, the digital rupee can be used only for interbank payment (not internet banking). This may be beneficial during cross-border payments. For retail usage, RBI has to analyze the cost of using, security, availability, convertibility into other forms of money, interoperability across other payment instruments, etc to promote digital rupee. All these factors contribute to the Indian digital economy.

Operational challenges for RBI

RBI will have to carry out additional tasks such as development and administration of digital rupee system, customer onboarding and due diligence, transaction authorization, maintaining system security, ensuring interoperability with other systems, executing partnerships with third parties, and designing and implementing a regulatory framework for CBDC

  • Some of these functions may be outsourced, in that case, RBI will have no direct relationship with the end consumer. However, it will still need to develop monitoring, oversight, and risk management functions, evaluate third-party risks and establish systems to respond to potential CBDC disruptions that could result from operational failures or cyber breaches
  • If RBI takes the entire service under their responsibility, then, such new areas of activities will require new competencies within the banking. This involves costs, risks, responsibility, and the degree of the bank’s operative control.

Legal challenges for RBI

  • RBI Act and the Coinage Act, 2011 gives legal tender status to banknotes and coins only, digital currency needs amendment to existing law.
  • Next, the PSS Act refers to a “ payment system” as “a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange.” This payment processing is authorized by RBI and regulated under PSS Act. A new form of money (apart from banknotes) requires amendment.
  • If … I repeat… if the govt declares digital rupee within the meaning of banknote under Sec 25 of the RBI Act, then CBDC has to work within the framework of a banknote.

These legal complications are not just specific to India.

171 countries face similar legal challenges as 61% of bank laws are limited to coins and notes. Nobody imagined that one day we will be using a digital format apart from a physical format of money. (Pls don’t confuse digital payment with digital currency, both aren’t the same)

There’s one more major hurdle here

At the moment, only banks are allowed to open and maintain accounts directly with RBI. In the case of CBDC, the law has to empower RBI to open accounts for other users (non-banks). To avoid this complication, RBI may be forced to outsource a few of its services (now pls refer to operational challenges para).

In this case, the entire PSS Act has to be reinvented to allow 3rd party authorization for transactions apart from RBI.

The digital rupee has impacts on other laws too outside the banking system

  • Prevention of money laundering law
  • Tax laws
  • Data protection and privacy law
  • Criminal laws which deal with counterfeiting of currencies

Based on all these learnings, we can conclude that DIGITAL RUPEE needs a proper and well-researched approach before implementation as it has a direct impact on the banking sector and the Indian economy as a whole.

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