Various countries pursue launching a central bank digital currency (CBDC). China is well ahead of the rest of the world, although India may follow suit soon. Issuing a digital rupee can introduce some crucial benefits, even if it isn’t a perfect solution.
Boosting Financial Inclusion
Like other developing nations, India is home to various levels of financial inclusion. Most average people have basic access to products and services, although their individual mileage may vary. However, there is a growing gap between the rich and the rest of the population. A digital rupee can streamline access to financial services, especially for those in India’s unbanked or remote regions.
Ideally, improved financial inclusion leads to broader participation in the official financial system. However, bringing a digital rupee to remote and unbanked regions may prove tricky. After all, those regions may not have reliable internet connectivity. That would make interfacing with a CBDC very difficult, even if most citizens in the country have one or multiple smartphones.
Improved Efficiency And Speed
Conducting financial transactions can be incredibly slow, even on the best of days. It is not abnormal for bank transfers to take one business day or longer to clear, even for domestic transfers. That status quo is no longer acceptable in 2023 and beyond. Transfers should be nearly instant regardless of their size and value. A digital rupee can help improve things in that regard, as it paves the way for faster and more efficient transactions.
In addition, a CBDC can help reduce the time and cost of moving money between individuals and businesses. That can only happen if the digital rupee is the go-to currency and everyone gets on board. For now, the Indian government has yet to unveil whether this currency will be opt-in or mandatory. The latter seems to be the ideal option to avoid unnecessary confusion.
Monitoring and Control
One of the primary concerns regarding CBDCs is how governments and banks can closely monitor consumer behavior. They could not do so with cash, yet a digital rupee would provide so much more data for these institutions. While that gives the government and central bank an overview of India’s monetary system and flow of funds, that isn’t necessarily a good outcome. However, it will help curb criminal activity and funding, which is a big benefit.
Ensuring the benefits of the digital rupee outweigh the potential drawbacks will be crucial, though. One should not dismiss the “surveillance state” India may become when dealing with a CBDC. It is up to the government and central bank to ensure transparency where necessary and privacy otherwise. Whether they will find a middle ground between the two is a different matter.
Enhancing Financial Security
The concept of a digital rupee would make concepts like terrorist funding much more difficult. However, it can also enhance the detection of fraud and money laundering. As all transactions are recorded on a centralized ledger, there is no reason for anyone to “misbehave”. That doesn’t mean criminals and hackers won’t try to game the system. Even with a CBDC, there is a good chance of things going wrong.
One thing is certain: India’s financial system needs to increase its trust rating. Since the overnight decision to make certain cash bills worthless a few years back, Indians have grown more opposed to the central bank and government. A central bank digital currency may help rekindle trust, although only when executed and planned well.