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Mains Practice Questions

  • Q. What is e-Rupee? How would it affect the existing banking system in India? (150 words)

    02 Nov, 2022 GS Paper 3 Economy

    Approach:

    • Briefly explain e-rupee.
    • Discuss how will it affect the existing banking system.
    • Discuss various challenges of e- rupee.
    • Conclude suitably.

    Introduction

    • The Reserve Bank of India (RBI) will issue the digital currency which will be called as Digital Rupee.
      • A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region).
    • The digital rupee will allow users to transfer purchasing power from deposit accounts into smartphone wallets in the form of online tokens, which like cash will be a liability of the Reserve Bank of India.
      • A digital rupee will be like banknotes, minus ATMs.

    Body

    • E-rupee could transform the traditional banking system
      • E-rupee will revolutionize the existing banking and consumer behavior system, as it will bring in the best of both worlds - the convenience and security of digital forms like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system.
      • It will mitigate the risk of losses that Indian depositors face when dealing with commercial banks.
      • Consumers may find an e-rupee to be a safer alternative to bank deposits, which underpin ₹76 trillion in annual real-time payments via apps like Phone Pe, Google Pay and Paytm.
      • As purchases go online, the basis of trust in demand deposits, that they convert to cash at face value, may get reduced to a theoretical construct.
        • An e-currency could keep the notion of convertibility grounded in daily reality.
      • It could eliminate the need for an expensive network of correspondent banks to settle cross-border payments.
        • For Indians working abroad, sending money home will become simpler and cheaper resulting in huge savings for India, the world’s top recipient of remittances.
    • Challenges of e-rupee
      • Breaches of cybersecurity
        • Digital currency is exposed to the risk of cyber-attack, and cyber criminals have in recent years stolen digital currency worth billions of dollars.
      • Loss of privacy
        • Digital currency raises serious privacy concerns.
        • Privacy is an important issue because protecting freedom of speech requires protecting private property and private contracts from the control of the state and political interference.
      • Consolidation in the banking industry
        • The advent of CBDCs may lead to consolidation in the banking industry. According to McKinsey, global payments revenues reached $1.9 trillion in 2018 and around 37% of that revenue was captured by banks. Digital currencies will offer lower transaction costs, and many transactions will be settled on a peer-to-peer basis or at the central bank level. This means commercial banks will see revenues fall as they capture a thinner slice of a shrinking market.

    Conclusion

    • Need of the hour is a well-evaluated implementation as with depleting usage of paper currency, there is a need to popularize electronic platforms of currency. This becomes more efficient in high physical cash usage economies like India.
    • Further, there need to be a foolproof cybersecurity policy of the government that doesn’t compromise with the safety of customer’s and financial institution’s data and money.

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