What is Digital Rupee?

The E-Rupee (e?), also known as eINR or Digital Rupee, represents a tokenized digital rendition of the Indian Rupee, introduced by the Reserve Bank of India (RBI) as a Central Bank Digital Currency (CBDC). This digital currency initiative, conceptualized in January 2017, came to fruition with its official launch on December 1, 2022.

Unlike cryptocurrencies such as Bitcoin, the digital rupee is a central bank digital currency (CBDC), meaning it is issued and backed by the country's central bank. This ensures that the digital rupee maintains the stability and trust associated with traditional fiat currency.

The advent of the E-Rupee presents a compelling alternative to traditional paper currency, a medium characterized by a prolonged issuance process incurring substantial government expenses. To illustrate, the production, distribution, and return due to wear and tear of a single INR 100 note can account for approximately 15%–17% of the total expenditure over a four-year lifecycle. The escalating circulation of physical currency not only strains distribution and storage networks but also poses environmental challenges due to its carbon footprint.

"The more cash we have in circulation, the harder it becomes for the authorities to manage it. This means they have to carefully watch how money gets printed, distributed, and stored, Digital rupee seems to be the best way to counter this." shares Pavitra Pradip Walvekar

This heightened demand for physical currency introduces various risks, including counterfeiting, spoilage, and security concerns. Notably, the Reserve Bank of India (RBI) reported a surge in counterfeit 2,000 and 500 currency notes during the fiscal year 2021–22, underscoring the severity of the issue.

In addition to these risks, the vulnerability of carrying cash lies in the ever-present threats of loss or theft. The introduction of E-Rupee as a Central Bank Digital Currency (CBDC) empowers central banks with enhanced control over their usage and distribution. This strategic move by the RBI aligns with the primary motivation behind launching CBDC – mitigating the risks associated with traditional currency, fostering efficiency, and bolstering financial security.

How it works 

The digital rupee operates on a blockchain-based system, providing a secure and transparent platform for transactions. Utilizing distributed ledger technology, the digital rupee ensures that every transaction is recorded in a tamper-proof manner, enhancing the overall integrity of the monetary system. Individuals can access their digital rupee through digital wallets provided by authorized financial institutions, making transactions seamless and efficient.

Talking about the role of banks, Pavitra Pradip Walvekar shares, “Banks have played a crucial role in this success story, offering user-friendly digital wallets and interfaces that enable individuals to seamlessly integrate the digital rupee into their daily transactions.”

“I believe that in few years the physical banks will see much less footfall due to complete digitization, which is just what is required for us as a developing nation”, Pavitra Pradip Walvekar adds.

Responding to a push from the RBI to enhance digital rupee transactions, Indian banks are now offering incentives for E-Rupee transactions. Notably, some major private and state-run banks have chosen to disburse funds linked to employee benefit programs directly into employees' CBDC wallets instead of their regular salary accounts. Among these proactive banks are HDFC Bank, Kotak Mahindra Bank, Axis Bank, Canara Bank, and IDFC First Bank.

Data and privacy issues

Like every new technology these days, the privacy and data concerns are paramount.

“While the notion of transparency is ostensibly lauded, the asymmetry in access to financial information raises questions about accountability. The government's ability to scrutinize every financial move of individuals without reciprocating by revealing how taxpayers' money is utilized creates a disconcerting power dynamic. Clarity from the government regarding the degree of control they will wield over the currency is essential. Concentrated power in the hands of a select few has the potential for misuse.” Says Pavitra Pradip Walvekar.

Furthermore, the programmability of CBDC introduces a new level of government intervention into personal spending choices. Unlike traditional currency that allows individuals the freedom to allocate funds according to personal preferences, a programmable currency enables authorities to impose restrictions on expenditures. The potential scenario where the government sets limits or disables certain spending options based on subjective judgments, such as curbing consumption deemed excessive, raises concerns about overreach and the curtailment of personal freedoms.

In the realm of technology, akin to a double-edged sword, the introduction of CBDC demands a cautious approach. While the digitalization of currency offers convenience and efficiency, it necessitates a robust framework for privacy protection and data security. Striking a balance between embracing technological progress and safeguarding individual liberties becomes imperative to avoid unintended consequences that may compromise the essence of a free and democratic society. It is essential for society to tread carefully and advocate for stringent safeguards to ensure that the deployment of CBDC aligns with the principles of privacy and protection of individual rights.