Daybreak - The e-rupee is stuck between UPI and cash

Episode Date: December 13, 2022

It’s been two weeks  since the RBI launched a pilot version of the e rupee. But many things are still up in the air about it, including concerns about the anonymity of transactions and if it will hold against one of the largest digital payment systems in the world.Tune in.For more read: How will the e-rupee beat UPI?

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the same. secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they managed to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into.

to the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert, as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcast. or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode.

It's been about two weeks now since the RBI finally launched a pilot version of the Erupee. But many things are still up in the air about it, including the privacy of these digital transactions. So on the 7th of December, T. Rabi Sankar, the deputy governor of the RBI, clarified that the central bank is working on ways to keep E-Rupy transactions anonymous. He said that the RBI wants to achieve this through technological and legal solutions. But cash transactions already exist.

People are used to it, plus they give people the kind of privacy that they want. In fact, even now, despite all the options that exist for us to move to a cashless economy, cash usage in India is at an all-time high. And as for non-cash transactions, we have the UPI. It is already a well-established and widely used digital payment system. So what is the point of an E-Rupi that? In fact, so many have brought this question up that the governor of the RBI, Shakti Kanda Das,

himself was forced to address it recently in a press conference. A number of people have been asked. asking to RBI to me and also questions have been raised in the newspapers, in the electronic media as to what essentially is the difference between UPI and this CBDC. So now not only does the E rupee have cash to contend with, it also has to beat UPI, one of the largest digital payment system in the world. Welcome to Daybreak, a brand new podcast from the Ken. I'm your host Nick Dha and in each episode I will tell you a business story that is current, significant and most importantly interesting. Today is Tuesday the 13th of December. The E rupee, as we're calling it in India, is essentially a central bank digital currency or CBDC.

According to the RBI, CBDC is a legal tender issued by. a central bank in digital form. Now, you would think what is the difference between this and the money that you already have in the digital form in your bank account? The RBI says that the difference is significant. And that is because the E rupee would be a liability of the RBI and not of a commercial bank. My colleague and the CEO of the Ken, Praveen Gopal-Khrushnan, or PGK,

as we like to call him, gave the perfect example of this in his weekly newsletter, the Nutgruff. He says, and I'm quoting, if you put your money in a bank account and the bank went out of business tomorrow, you would lose your deposit, right? That money is yours, but there is nothing guaranteeing

that all of it will always belong to you. You can park rupees in relatively safer places like a Provident Fund account or in riskier places like crypto. But in all these cases, the money is never entirely yours. It is a form of an obligation. In that sense, the rupee is also a form of obligation to you, the bearer from the central bank. It is arguably the most secure form of an obligation. That is why your currency note is signed by the governor of the RBI, guaranteeing that

the bearer will be paid the amount. Now, this specific form of rupee, the most secure one, backed by the central bank does not exist in the digital form. So if you wanted to take all your cash and convert it electronically and have the same principles of guarantee apply to it, there is no way to do that. End quote. But the e rupee is going to change that. Because it is a legal tender directly issued by the RBI,

which is why the RBI says that CBDCs will have no. no liquidity risk, no credit risk and no market risk. But the thing is that there are still many unresolved doubts about the privacy of transactions involving the e rupee. What I mean by that is when you pay someone by cash. The government or your bank has no record of that transaction, right? No one is keeping an eye on every transaction that you make. It's only when cash transactions are more than 50,000 rupees such as bank deposits or purchases

that customers are required to disclose their permanent account number or pan. Say I transfer money to you in the form of e rupees from my bank account to yours, you and I both would get SMS's right. That is a trail that banks can trace. Even expert Anirut Somani, a qualified CA who has a postdoc from IIM Calicut, wrote about this a few months ago in Kaching, our weekly newsletter about all things fintech. He said, and I'm quoting, I am highly skeptical whether the privacy quotient of CBDCs will be anywhere near cash.

That's simply because it is like programmable cash, which means that CBDCs enable central banks to have direct insight into the identities of transacting parties, and they can block or censor any transaction. End quote. In fact, some bankers told the economic times that the CBDC gives far greater anonymity because the transactions

are not hitting your bank account. Once you move the money to the wallet, it will not be reported. You will be able to transfer it to another wallet without going through the bank. But another banker told economic times that while the transactions will be anonymous, they will always be traceable.

Plus, like I said earlier, we are still a cash-first economy. In fact, cash usage, is at its highest point right now, at 70% higher than it was in November 2016, before demonetization. But after 2016, there is no denying that the usage of UPI also skyrocketed. But like BGK said in his newsletter, correlation is not causation. But yes, demonetization is where it all began. But that is not even the point.

The question is that there does not seem to be a solid incentive for people to use the E-Rupi over UPI. UPI is already widely used as a mode of digital payment. It almost has zero transaction costs. It is already on our phones. We use it almost every day for non-cash transactions. In fact, nearly 76% of Indians now prefer using UPI during online checkouts. and 84% of millennials are now using UPI when shopping online. And then there might be one more problem.

The e-rupee might make the banks unhappy. How? Because just by design, the e-rupee kind of undermines the bank's lending power. Because the e-rupee is going to be available when you want and you can transfer it with zero cost. There is no way for anyone to apply any transaction cost on it. Also, if you have a digital rupee in a wallet on your phone, then the reasons for you to have a bank account in the first place goes down. And that is what might affect how banks can lend money.

Plus, UPI is already weakening the core banking system used by most of India's banks. Banks are not being able to keep up technically with the UPI. The number of transactions are rising and the bank's old legacy software systems are having transatlanticity. taking on that kind of pressure. But through the E-R-R-Pee, money will be transferred without hitting the core banking system, which sounds perfect, right? But there is a problem. UPI is coming up with something similar called UPI Light.

So not only does the E-R-R-Pee have to deal with the digital payments behemoth, it also has to deal with an upgraded version of it. Add to that the challenge of matching the perks of cash in what is. is still a cash-first economy. For now, the E-R-Pee seems to be stuck between the devil and the deep blue sea, and the chances of success are quite slim. What do you think? Write to me with your answers at daybreak at the ken.com.

It is dh-he-k-en.com. Also, I would love to hear what you think of this podcast, so please, if you have any feedback and suggestions on how we can make it better, please write to me. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website.

I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.