The adoption of digital technologies is on the rise. In the banking sector too, we are witnessing a shift from paper-based transactions to more secure, efficient, transparent and lower-cost digital transactions. Reserve Bank of India (RBI) is looking to make India a “cashless” economy by 2020—an ambitious goal, but we are moving in the right direction. According to reports, in 2015, the total worth of cashless transactions in the country was R92 lakh crore ($1.43 trillion), surpassing the amount transacted with paper-based means for the first time, mainly due to large government and business transactions.
The challenge ahead will be migrating our day-to-day, small-amount transactions to digital means. India is making great strides to accomplish that. More than 950 million people in the country have gotten unique, biometric IDs through the Aadhaar platform, which is now being used to set up new bank accounts for the unbanked. Our new regulatory framework, once in operation, will grant licences to 11 entities which are interested in establishing new payments banks.
As more of India’s transactions migrate to the electronic format, the more we worry about the risks associated with going digital. Has the time come, therefore, for a centrally-issued sovereign digital currency? The case for central banks to be the sole issuers of sovereign digital currency becomes an urgent need in an increasingly digital economy. The introduction of a central bank-issued digital currency in India could trigger a cascade of economic and societal benefits, while also encouraging financial inclusion and transparency.
At the economic level, a central bank-issued digital currency would deliver major savings to both the government and taxpayers. The costs of minting and deploying it are a fraction of the costs of printing, securing, distributing and eventually destroying paper-based money. In addition, savings are expected to increase further as more transactions are conducted digitally, delivering a substantial boost to productivity and growth across the entire economy. A central bank-issued digital currency would also infuse more trust into the current payments systems, especially newer ones, such as mobile money. Moreover, it is far more secure than cash and coins.
From a policy perspective, a sovereign digital currency can help central banks fully realise their responsibilities as sole issuers of national currencies and maintain monetary policy effectively without the need for new regulatory frameworks. A sovereign digital currency can also provide policy-makers with visible, near real-time, actionable data, allowing them to act more quickly and effectively on monetary and other policy challenges with better, more targeted responses.
In India, the introduction of a sovereign digital currency would help address one of our major challenges—black money. As more transactions are conducted electronically, more transparency is embedded into the system, allowing authorities to better monitor the movement of money in both government and public sector transactions.
Several superior features compared to privately-issued digital monies, such as Bitcoin, also make the digital fiat currency attractive. First, privately-issued digital currencies are not interoperable—meaning they can only be used on the issuer’s payment platform—which significantly limits their value as a payment instrument. In addition, they follow inconsistent and arbitrary rules. Interoperability is an essential component of currency—with a rupee in hand, we know we can transact anywhere within our borders. A digital currency should offer the same benefit—frictionless movement between the many payment platforms available to consumers today, whether transacting on a prepaid card, a digital wallet on a mobile phone, or transferring money between accounts.
Another major concern is what the World Bank calls systemic risks—privately-issued digital monies lack consumer and merchant protection on a number of levels. Firstly, if a private-sector issuer of digital money collapses, then everyone holding that digital money loses out, with no redress. Moreover, as these digital monies proliferate, the central bank does not have any visibility into the total sum of digital money in circulation, bringing to the forefront the question of how its value can be governed? Without visibility into the total sum of digital money in circulation, RBI is severely limited in its ability to adjust national money supply—an integral monetary policy function.
On the other hand, if a digital currency is issued by the central bank and has the same legal tender status as the country’s notes and coins, it can serve as a pivotal and powerful instrument of economic growth. It puts to rest all concerns around security risks, losses incurred due to volatility, money laundering and taxation.
Relegating our citizens to conduct their financial lives on a cash basis will continue to perpetuate the poverty cycle, holding back their opportunities of building a better future for themselves. India has made great progress on new legislation that encourages innovation and allows new players to improve upon the current infrastructure. Now that the pipes are well under way, the time is coming for working on the water that will run in them.
The author is a partner at philanthropic investment firm Omidyar Network and a member of the Banks Board Bureau
Views expressed in the article are personal