Global monetary system is all set to undergo transformation as the Covid crisis among other things has pushed the central banks across the globe to pursue digitalization of the monetary system. In fact, digitalization of the monetary system is seen as one of the arsenals to fight the COVID-19 infection. In the outbreak of coronavirus, it was found that currency notes and coins can aid the spread of this deadly virus. Some countries asked their citizens to stop using currency notes altogether. South Korea’s central bank took all notes out of circulation for two weeks, and even burning some, to reduce the spread of the virus. China burnt a good chunk of its currency as a measure to put breaks on the outbreak of coronavirus.
In digitalization of the monetary system, the primary move is to shift from physical currency to digital currency. In other words, it’s the physical nature of currency which will get eliminated, if not fully, but to a large extent. However, the electronic money replacing the current physical form of money is not a process that would happen overnight. This kind of transformation can even take years. The risks associated with electronic transactions have equally been growing with the advancement of technology and understanding these risks and making the electronic financial system foolproof around the digital money would be time consuming. Precisely, scientists in the financial system have to work overtime to develop a financial vaccine to keep the digital money insulated against unknown risks.
However, at the moment, the process seems to have seen light of the day as central banks across the world have dished out their intentions to launch digital currency. Even as ideas about digital currency owned by the governments were off and on floating in pre-Covid times, the outbreak of coronavirus pandemic forced the world authorities to prioritize the process of moving from physical cash to digital (electronic) cash. Notably, the “end game” of the pandemic is viewed in the elimination of cash, on the grounds that it helps to spread the Covid infection.
When we discuss digital currency, there would be a common argument that digital currency is already in place in the shape of cryptocurrencies and now central banks thinking to shift from physical to electronic currency is not a new thing. The argument holds ground. But the fact is that a cryptocurrency is a variant of digital currency.
There are some key differences between the cryptocurrency and the digital currency which central banks across the nations are talking about for future use. Digital currencies are centralized, meaning that transaction within the network is regulated in a centralized location, like a bank. While cryptocurrency is a specific type of digital currency whose unique angle and appeal is privacy, decentralization, security and encryption. This type of currency is not regulated and government has no control over it.
Here it’s worth mentioning that very recently head of the European Central Bank, Christine Lagarde, at a virtual economic conference hosted by Reuters, confidently talked about the launch of the digital euro in no more than five years. “With this currency, daily payments will be made efficiently, quickly and securely,” she said.
Notably, cryptocurrencies are gaining ground world over among ordinary investors, who seem increasingly convinced that cryptocurrency like Bitcoin will be a long-term asset. These investors don’t consider this unregulated virtual currency a speculative bubble and ignore the fear of losing moneyexpressed by some analysts and investors. Interestingly, some major world economies used to consider cryptocurrencies too small to jeopardize their financial system. But, the unprecedented boom in cryptocurrencies such as Bitcoin with ordinary investors boarding the bandwagon, many central banks are expressing their apprehensions that such unregulated virtual currencies are easily used in money laundering. They now vehemently demand that there must be regulations in place, applied and implemented globally.
In the context of India, currency issue has remained hot after demonetization of high value currency notes of Rs.1000 and Rs.500 denominations (constitution 86% of the total currency in circulation) in November 2016 . Even today, the shocks of demonetization are refusing to die down from the general public memory. Two major news reports about Indian currency hit the headlines; one hinting at another demonetization drive of banknotes and second report talking about digital rupee in future.
Few days back currency notes yet again became a cause of concern for general public as a news report went viral which claimed that Reserve Bank of India (RBI) would be withdrawing old currency notes of Rs.100, Rs.10 and Rs.5 denominations. However, the RBI was swift in denying the report and clarified that the apex bank has no intention of withdrawing these old series banknotes. In a tweet from its official Twitter handle the RBI stated that “such reports are incorrect.”
Of course clarifying the news report as ‘incorrect’ was a big relief to the public, but the kind of unpredictable nature of governance we have come across in the last six years makes a sense for common people to not rule out another demonetization drive in future completely. Here, anything happening anytime is now an established norm of governance, be it political governance or corporate governance.
While ruling out any move to withdraw old series banknotes of Rs.100, Rs.10 & Rs.5 denominations, the RBI in a statement has dished out its plans to consider digital version of rupee. A few days back, the central bank released a booklet on ‘Payment Systems in India’ in which it has stated about exploring the possibility as to whether there is a need for a digital version of fiat currency and in case there is, then how to operationalise it. The apex bank noted that rapid innovations in the payments sector have made central banks around the world to examine digital routes.
Even as introduction of digital currencies around the world was gaining traction in the given advanced technology, the regulators and the governments were skeptical about these currencies and were apprehensive about the associated cyber risks. But the Covid-19 has pushed the governments across geographies to consider the launch of regulated digital currencies as soon as possible. Now it seems impossible in the Covid-induced urgencyto dump any such project in future.
If we look at the changing landscape of payment system owing to Covid pandemic in India, we find cash being eliminated even in smallest transactions now and digital payments fastbecoming order of the day. Whether Covid crisis prolongs or ends, a well regulated electronic monetary system with digital rupee as its spinal cord is inevitable.
Here it makes a sense to mention that cryptocurrencies have grown unprecedentedly in Covid crisis which has caught the attention of government to consider and roll out their own version of digital currencies. India seems a fit case for lunch of digital currency. A data complied by the RBI shows that adoption level of digital payment transactions in the country is much higher compared to many of the developed markets such as the US and the UK, where consumers predominantly use cards. The RBI data reveals the rise in digital payment transactions in the country to 3435 crore processing Rs 1623 lakh crore by value in March 2020 from just 96 crore transaction processing Rs 498 crore by value in March 2011 representing a compounded annual growth rate of 12.54% and 43.01% in terms of volume and value, respectively.
India has been pursuing its mission to launch a digital currency since long and the crisis is an opportunity to realize the dream. Experts have also been pitching for introducing electronic currency by bringing advanced technologies into play to safeguard the interests of the country and its citizens. So, with many revolutionary technologies like payment mechanisms such as UPI, blockchain available around us, a lot can be achieved in the financial landscape. By invoking technology to design a digital currency platform can unlock numerous ways for much better economic practices.
Of course, use of physical currency notes can’t be stopped abruptly, but establishing a platform for digital currency can be started right now and then rolled out in phases to fully substitute physical currency. For a while, digital as well as physical currency can be allowed to co-exist.
(The views are of the author & not the institution he works for)