E-Rupee A Gamechanger?

Central bank digital currencies have some little-known downsides. RBI needs to assess them

- Duvvuri Subbarao

When you hold a hundred rupee note in your hand, you will see a pledge by the RBI Governor: “I promise to pay the bearer the sum of one hundred rupees.” What does this pledge mean when you are actually in physical possession of the currency note?

Like most people, I too never bothered to probe this until I became governor and it became part of my job to understand the import of a promise I was making. I was told that this meant the governor is guaranteeing that the note is legal tender, and cannot be refused as a means of payment. A conscientious governor will also see this as a reminder of his duty to preserve the purchasing power of the rupee by keeping inflation low and steady.

How will the governor make this promise with the digital e-Rupee that RBI is reportedly planning to issue?

That raises a more basic question. Why are RBI and nearly a hundred other central banks around the world contemplating issuing digital versions of their national currencies – central bank digital currencies (CBDCs)?

The basic motivation seems to be fear that their money will be displaced by private cryptocurrencies that – pardon the pun – are gaining currency. In fact, central banks were quite nonchalant when bitcoin and its many clones emerged a dozen years ago. Notwithstanding their libertarian charter of freeing people from the tyranny of fiat currencies issued by central banks, this first wave of cryptocurrencies failed to replace traditional money largely because their values fluctuated widely.