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.