Will a Digital Rupi kill the paper Rupi?

The RBI’s plan to launch an Indian crypto currency, the digital rupee, could be a gamechanger.

The RBI’s plan to launch an Indian crypto currency, the digital rupee, could be a gamechanger when it comes to financial inclusion and government transfers. But will people stop using currency notes?
Crypto currency adoption in India is growing at an astronomical rate. As per data from Bloomberg Wealth, the crypto currency market cap in India grew from $923 million in April 2020 to $6.6 billion in May 2021. An estimated 15 million people in India now invest in crypto currency. Indians are far ahead of the UK which has an estimated 2.3 million crypto traders and fast catching up with the US, which has 23 million crypto traders.

Why are so many people in India and the world enamoured with crypto currency, or more broadly, digital currency? To answer this question, we need to understand the genesis of digital currency. In the crypto-community, Sakushi Nakotomo is regarded as the father of crypto currency. In his pathbreaking white paper on Bitcoins in 2008, he outlined the vision for a peer-to-peer electronic exchange for money that does not require banks as an intermediator. This was in the aftermath of the global financial crisis of 2007-08, where many people's faith in commercial banks was shaken to the core. Advancements in cryptography and the blockchain technology provided the perfect foundation for building this electronic peer-to-peer exchange, with the help of a decentralised ledger maintained in a public network which eliminated the need for banks.

What is crypto-currency?
Unlike paper money, which can be printed and augmented by central banks, this digital currency has a finite supply, and can only be generated by "virtual mining", a task which requires intensive CPU power to solve complex cryptography problems to maintain the decentralised ledger. Being finite in amount, it was a natural hedge against inflation. It’s also possible to move this currency across borders with negligible cost compared to paper money, which typically loses 3% to 6% purchasing power value during conversion from one sovereign currency to another.
Tech-savvy and high net worth investors were quick to applaud and adopt Bitcoin. While Bitcoin had several advantages over paper money, it had some key drawbacks. Since many investors considered it to be “the future of money”, its value grew very rapidly, and it became an asset for speculative investments. With limited supply and no central agency to govern its price, it became very volatile.

Advantages of a Digital Rupee

* Eliminates inter-bank cash settlements, as it is maintained with distributed ledger technology

* Can be used efficiently for government subsidy transfer programmes

* Can promote financial inclusion, as it’s directly owned and transferred by end customers, does not need banks

* Private sector wallets and payment systems will support the Digital Rupee as a currency

This led to the development of a different class of crypto currency called stable coins which are pegged to an asset which is less volatile e.g., the US dollar. Tether was the first such stable coin designed in 2014, and this was interchangeable with a US dollar. However, it was still a private currency issued by a private institution, and it was vulnerable to a public “crisis of confidence” which could lead to a bank run and rapid depreciation in its value.
While crypto currency continued to evolve, in parallel, a whole new industry of crypto currency exchanges emerged. These exchanges allowed the common man to buy and sell crypto currency with his money stored in sovereign currency in a bank account. This crypto currency is held in a wallet maintained by the crypto exchange. India has many such crypto currency exchanges, including the likes of WazirX, Coin DCX, CoinSwitch Kuber and Zeb Pay, which have millions of users by now.

The crypto risk
The rapid adoption of cryptocurrency has worried central banks all over the world, as these currencies pose a risk to their sovereign currencies (referred to as "fiat" currencies). There is a real risk that there may be a massive flight of capital from the incumbent fiat currency to crypto currency, leading to volatility or devaluation of the fiat currency, thereby destabilising the economy. Smaller countries with smaller market capitalisation of their sovereign currencies are at greater risk.
There is also a risk that the rise of crypto currency could lead to concentration of power with a few big private companies like Facebook, which has recently announced its own crypto currency named Diem, which is pegged to the US Dollar.
In 2018, RBI had banned banks in India from trading in crypto currency to protect Indian people and the economy from these risks. However, the Supreme Court, in its landmark judgement in March 2020 decided that the RBI ban was unconstitutional. Since then, crypto trading in India has grown at an exponential pace and many crypto exchanges in India have become either unicorns or soonicorns (soon to be unicorns).

Joining the crypto bandwagon
Since central banks could not control private sector innovation and public adoption of crypto currencies, they have decided to join the bandwagon of digital currencies. Major central banks across the world are in a race to develop their own digital currencies, pegged to their sovereign currencies commonly referred to as central bank digital currencies (CBDCs). The People’s Bank of China is conducting trials with Digital Yuan, The European Central Bank has announced a Digital Euro Project, the US Federal Reserve is working on a US Digital Dollar and Reserve Bank of India is working on a Digital Rupee.

A Digital Rupee will have several benefits for India. It can be used efficiently for government subsidy transfer programmes (while being programmed for a specific end use), and it can promote financial inclusion in remote areas where it can be directly owned and transferred by end customers without needing banks. It will also eliminate the need for inter-bank cash settlements as Digital Rupee transactions will be accounted for and maintained with the help of Distributed Ledger Technology. All private sector wallets and payment systems will also support the Digital Rupee as a currency, and it will further India’s vision for a cashless economy.

Not surprisingly, blue blooded crypto-currency aficionados worldwide do not like CBDCs because it gives back power to the central banks. Central banks will be able to limit and augment the supply of CBDCs as they deem fit. On the flip side, crypto exchanges in India are very happy as the launch of a Digital Rupee will help further increase awareness about the benefits of digital currencies, potentially leading to mainstream adoption of crypto-currencies.
While the benefits of digital currency versus paper currency are obvious, it comes with its new sets of challenges. Hackers are increasingly targeting crypto exchanges to steal their crypto coins. In future, hackers could also target and compromise central bank currency ledgers. Paper money also offered anonymity, whereas a CBDC would be traceable by the agency, and hence needs a framework to protect user privacy.

Despite these challenges, the notion of paper money does not seem tenable anymore. The day is not far where future generations will laugh at us for ever having used paper money. While we relied on one single fiat currency issued by RBI for all our transacting needs, they may very well be using a bouquet of digital currencies. The advent of digital currencies could very well be a death blow to paper money.

Ayush Mittal is a champion of the transformative potential of technology and artificial intelligence on consumer finance.

Source: TOI+


  1. In general, the process is voluntary, minimizing the transaction costs associated with violating a provision of the FEMA, 1999, while still providing individuals and RBI compounding application corporations with a sense of security.



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e-Rupi: Will a Digital Rupi kill the paper Rupi?
Will a Digital Rupi kill the paper Rupi?
The RBI’s plan to launch an Indian crypto currency, the digital rupee, could be a gamechanger.
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