Last week, the Reserve Bank of India was in front of the Supreme Court. 

And, well, it now has a task on its to-do list.

Six years ago, overnight, the government of India demonetised cash. The reasons were wide-ranging. Some reasons told to us were things like eliminating black money, destroying counterfeit currency and fighting terrorism. Today, there’s nothing to suggest that demonetisation achieved anything apart from helping us make new friends while waiting at an ATM queue.

Anyway, a bunch of people petitioned the court to argue that demonetisation wasn’t done the right way. Basically, forget the outcome, they took issue with the procedure. So, the Supreme Court essentially said, alright, let’s talk about how you did it. And so arguments went back and forth about whether something as huge as demonetisation can be done using a gazette notification. Or whether a series of notes of a denomination can be demonetised at one shot. And then about whether this must be initiated by the RBI. Or can the government suggest it first and then consult the RBI. What did the RBI know? By when? What did they say? Where’s the documentation? 

I’m not going to lie to you. It’s not particularly exciting. And that’s not just my view. Initially, even the Supreme Court bench wondered aloud if all of this was merely an academic debate. But here we are, waiting for a sealed cover. 

I suppose some will argue that demonetisation thrust India forward into a cashless economy. Frankly, this is very shaky, because cash usage is at its highest point right now — at 70% higher than it was in November 2016 before demonetisation.  

But it is true that UPI adoption skyrocketed and rose after 2016, so I can at least get behind the narrative that digital, cashless transactions skyrocketed post demonetisation. Correlation is not causation, but demonetisation is where it all began. 

And today, six years later, poetically, the goal of a cashless economy is culminating with the ultimate goal — to make the rupee itself digital. 

Last week, the RBI went live with a pilot of the digital rupee. It’s called a CBDC (centrally backed digital currency), and it’s expected to reduce dependence on cash, lower transaction costs, and act as a way for us to efficiently transfer money to each other digitally, using a QR code.

But I’m guessing the main question in your mind is, “Am I not doing all this using UPI already? Why would I ever want to use this?”

You’d be correct. 

Because if it has to succeed, e-rupee doesn’t just have to beat cash. 

It has to beat one of the largest digital payment systems in the world. One that is already ubiquitous, easy to use and works reasonably well. 

Can it do that? 

Is there a scenario where you’d ever need to use this?

Well, let’s dive in.

When I first heard about it, I was a bit perplexed, because isn’t money in your bank account digital, anyway? 

Well, yes. But with a crucial nuance. If you put your money in a bank account, and if the bank went out of business tomorrow, well, you’d lose your deposit. That money is yours, but there’s 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 of these cases, the money is never entirely yours. It’s a form of obligation. In a sense, the rupee is also a form of obligation — from a central bank, but it’s arguably the most secure form of it. This is why your currency note is signed by the governor of the RBI guaranteeing that the bearer will be paid the amount. 

This specific form of a rupee, the most secure one backed by the central bank, does not exist in digital form. If you wanted to take all your cash, and convert it electronically, and have the same principles of guarantee apply to it, there’s no way to do that.

Until now. 

But there’s more. 

Because when you make the rupee digital, you can make it solve other things. For instance, you could attach an attribute to it that narrows how it can be spent. This is particularly useful for things like subsidies, especially for direct benefit transfers. If the government wanted to send you, say, Rs. 100 every month for you to buy LPG, they could create an LPG-rupee and transfer it to your account, which you can access on your phone. You’d then go to a LPG supplier and say, give me LPG, and ask him to scan your QR code. The supplier gets the money in his bank account, and you get your LPG. If you wanted to use your LPG-rupee to pay for a dosa at Rameshwaram Cafe in Indiranagar, well, it wouldn’t work. All of this is much harder to do with cash, or a cash transfer to your bank account.

In other words, the digital rupee can function as a Sodexo card. Or a digital ration card. 

This is quite useful. This is a real-world application that would be hard to solve through any existing digital payment methods. 

It only gets more complicated from here.

First, there’s the name itself. Nobody seems to know what to call it. Sometimes, it’s a digital rupee, or e-rupee, e-RUPI or e-₹. One news publication insists on calling it digipee in all its articles - I have informed the cybercrime cell about this. Anyway, my point is we’re really missing a clear, catchy name.

Then there are other perplexing things. In its pilot, the RBI announced that the digital rupee would also be issued in the same denominations as paper currency and coins, accessed via a wallet in a mobile app. I have no idea how this is supposed to work. So if I buy something and pay using the digital rupee, is the merchant supposed to return change in physical form? What if the change is just a few rupees? Is there a digital version of candy? So many questions. 

Finally, there’s the infrastructure itself. The digital rupee was also positioned as a “legal” version of cryptocurrency. And occasionally, there have been mentions of it being on a blockchain. However, the latest report indicates that it’ll probably be on a private blockchain. As far as I can tell, a private blockchain isn’t too different from a regular database.

It’s still early days, so I suppose we’ll know the answers to most of these in the months to come. 

But the one thing we do know is that banks are not going to like this. 

In many ways, the digital rupee undercuts what banks are for. It’s money, available when you need it, that can be transferred to anyone without any costs. No credit card fees. No MDR. No way for anyone to apply any transaction cost on it. Also, if you have digital rupee in a wallet on your phone, then the reasons for having a bank account goes down considerably, which in turn affects how banks can lend. 

All of this finally brings us to the UPI.

You could argue that’s what the UPI is today, more or less — a way to transfer money with zero transaction costs. It’s on your phone, using an app and a QR code.

That’s correct, but there’s a cost associated with UPI. 

And it’s an indirect cost. 

Because UPI is crippling the core banking system used by most of India’s banks.

Banks are unable to keep up, technically, with UPI. As the number of transactions swells, systems are going down, and it’s getting harder and harder to keep them up and running. 

The digital rupee, since it’s a wallet on your device, is intended to act as a way for anyone to transfer money without hitting the core banking system. It’s a wallet to wallet transfer. 

This is a great idea. 

Except, UPI is already working to solve this problem. 

By implementing a wallet on your device that’s intended to act as a way for anyone to transfer money to someone else, without hitting the core banking system each time. 

It’s called UPI Lite.

That’s the problem with the digital rupee. It has to contend with something that’s so powerful, that’s already working to address its shortcomings. In many ways, we are going back to the beginning. When UPI was launched, it killed wallets. And now there’s a wallet, which if it needs to succeed, must defeat UPI. 

Can it ever win? 

Well, it’s possible. But for that, we’ll have to look at what other countries have done to promote adoption of their digital currency. There’s China, which simply issued free digital yuan randomly to people, so they’ll use it. Most people love free money. I can see this working. 

What else? 

Oh there’s another way. 

It’s something we all are familiar with. 

It’s something we all remember, from that day in November six years ago. 

Here’s what happened this week, in Nigeria.

Let’s hope it doesn’t come to that. 

But if it does, hey, at least we’ll know the right procedure.