Introduction

According to the European Central Bank, Electronic money (e-money) is broadly defined as an
electronic store of monetary value on a technical device that may be widely used for making
payments to entities other than the e-money issuer. The device acts as a prepaid bearer
instrument which does not necessarily involve bank accounts in transactions. E-money products
can be hardware-based or software-based, depending on the technology used to store the
monetary value. In India, the adoption of e-money has been rapidly increasing due to various
factors such as the proliferation of smartphones, the government's push for digital payments,
and the growth of e-commerce. According to a report by the Reserve Bank of India, the value of
e-money transactions in India has increased from Rs. 17.9 trillion in FY2017 to Rs. 21.1 trillion
in FY2020.

Birth of e-money in India

The evolution of e-money in India can be traced back to the introduction of mobile wallets such
as Paytm and MobiKwik in 2010. These mobile wallets allowed users to store money digitally
and make payments using their mobile phones.

In 2016, the government launched the Unified Payments Interface (UPI), which allowed users to
transfer money directly from their bank accounts to other bank accounts using a mobile app.

The introduction of UPI has been a significant driver of e-money growth in India, with over 2
billion transactions worth Rs. 4.3 trillion in January 2021.

India’s burgeoning cashless society is a culmination of various factors such as the introduction
of the United Payment Interface, and the emergence of e-wallet players, further intensified by
the events like demonetization and Corona pandemic. Paying for a hotel room with a credit
card, getting a new TV on a debit card, or paying for vegetables on the street via a mobile
wallet: digital payments are omnipresent in the everyday life of Indians and have dramatically
changed consumer behavior in the country. Although cash remains the king, as evident in high
currency in circulation (CIC), the digital payment ecosystem grew exponentially in the last few
years. In the financial year 2022, over 72 billion digital transactions were recorded across the
country.

The digital rupee rollout is a big step ahead in India’s digital transformation. It will be an
excellent opportunity for India since it will potentially increase the ease of doing business, as
well as improve the resilience and security of the entire payments infrastructure.
Growth of e-money

Digital payments are a key rubric of the “Faceless, Paperless, and Cashless” objective of the
Digital India campaign. The National Payments Corporation of India (NPCI), founded as an
initiative by the Reserve Bank of India (RBI) and the Indian Banks’ Association, provides the
crucial infrastructure for several payment systems. Key modes of digital payment transactions in
India facilitated by NPCI, RBI, and banks include Bharat Interface for Money-Unified Payments
Interface (BHIM-UPI); Immediate Payment Service (IMPS); pre-paid payment instruments
(PPIs) and National Electronic Toll Collection (NETC) system in addition to pre-existing payment
modes such as debit cards, credit cards, National Electronic Funds Transfer (NEFT) and
Real-Time Gross Settlement (RTGS). RuPay was introduced as the domestic alternative to
Mastercard, Visa, and UnionPay. The latter was also part of the ambitious Pradhan Mantri Jan
Dhan Yojana (PMJDY) that aims at introducing digital payments and financial services to the
largely unbanked sections of society. BHIM-UPI has emerged as the key mode of digital
payment among the Indian population.
The ongoing trend in digital payments and investments in FinTech innovations resulted in a
highly competitive market, especially in the e-wallet segment. Paytm, Amazon Pay and Pay Pal
have emerged as popular fintech companies in the digital payment segment. These fintechs are
slowly moving towards localizing their product by providing services in multiple Indian
languages.

DIGITAL RUPEE

The Reserve Bank of India (RBI) had announced the launch of the first retail digital Rupee
(e₹-R) pilot on December 1, 2022.

The term pilot refers to the first-ever launch of a currency in the financial markets.

According to the RBI press release dated November 29, 2022, some important points to know
about the digital Rupee (e₹-R) pilot were:
● The pilot would cover select locations in closed user groups (CUG) comprising
participating customers and merchants.
● The e-Rupee would be in the form of a digital token that represents legal tender. It would
be issued. It would be distributed through intermediaries, i.e., banks. The Reserve Bank
of India (RBI) has announced that the first pilot in Digital Rupee - Retail segment is
planned for launch within a month in select locations. The central bank said that nine
banks -- State Bank of India (SBI), Bank of Baroda, Union Bank of India, HDFC Bank,
ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC -- have been
identified for participation in the pilot project.
● Users will be able to transact with e₹-R through a digital wallet offered by the
participating banks and stored on mobile phones/devices.
● Transactions can be both Person to Person (P2P) and Person to Merchant (P2M).
Payments to merchants can be made using QR codes displayed at merchant locations.
 ● The e₹-R would offer features of physical cash like trust, safety, and settlement finality.
As in the case of cash, it will not earn any interest and can be converted to other forms of
money, like deposits with banks.
The pilot will assess the stability of the complete creation, distribution, and retail use of digital
rupees in real-time. Based on the lessons learned from this pilot, other aspects and uses of the
e-R token and architecture will be evaluated in further pilots.

Why Rupee?
1) Centralised

Central bank digital currency (CBDC) – a new digital form of money issued by central banks –
may just be the new infrastructure we need for ushering in more trust, resilience, and efficiency.

The money will be in virtual form just like other cryptocurrencies but the digital rupee will not be
decentralized but will be regulated by the Reserve Bank of India (RBI). The digital rupee will be
completely legal and acceptable by the Indian Government. This ensures the trust of the public
in the digital currency, i.e., a regulated and far secure Rupee might become the choice of people
as against cryptocurrencies which are decentralized and unregulated.

2) Ease of use

Every unit of Central Bank Digital Currency can be uniquely identifiable and traceable. Secondly,
it could be made programmable i.e., there is potential to add multiple dimensions like prescribed
end uses, time limit, and transferability. Finally, CBDC is recorded on blockchain-powered
distributed ledgers which allows all participants/banks to record the transactions and balances.

Taken together, these three differentiating characteristics – identifiability, programmability, and

3) Global Acceptance

There will be no longer geographical limits with the internationalization of current and financial
account transactions. Digital Rupee that can be held by non-residents and is available to
conduct cross-border financial transactions seems a natural extension to enable new retail
payment possibilities and business ventures. The digital rupee is said to promote globalization
and bring more foreign exchange to the country.
4) Transparency

The launch of the Digital Rupee in India is expected to usher in more efficiency, transparency,
systemic resilience, and governance in the Indian currency management system. RBI data
shows that from 2018 to 2020, Indian banks lost approximately USD 50 billion to fraud.
According to a CVC report, one of the main reasons for the top 100 cases of fraud is the
improper end-use of lent funds. While the current system relies on post-facto checks such as
CA audit reports and stock statements etc, a digital currency could address these problems
proactively with installed programmability and regulated traceability.

5) No bank account needed like that for UPI

Among the major advantages of launching a digital currency in India, i.e., Rupee is that one
doesn't even have to open a bank account in order to carry on transactions.

6) The payment via digital currency or rupee will be real-time

Once the digital rupee is launched the Government can easily access all transactions within
authorized networks, and enable real-time account settlements and ledger maintenance, said
Nayar.

7) Likely to save operational costs of printing, distributing, and storing banknotes

The digitized currency will minimize the costs involved in printing, distribution and logistics
management of cash.

Not only will the rollout reduce the dependency on cash, but it will also forever remain mobile,
unlike currency notes.

India’s 17% cash propensity, the ratio of cash withdrawn to GDP, is higher than those of the
Nordic countries, such as the UK and Australia. Moving to digital payments and digital currency
could reduce dependency on cash.

8) Governments can access all transactions happening within the authorized networks

The adoption of the digital rupee is also likely to play a pivotal role in enabling easy monitoring
of Direct Benefit Transfers (DBT), making them relatively faster and reducing malpractices in the
payment system. Increasing the efficiency of digital transactions will surely add another
dimension to digital governance.

9) Cannot get physically damaged or lost

The benefit of digital currency is that they do not get torn, burnt or physically damaged. Neither
can they be physically lost. The lifeline of a digital currency will be indefinite compared to
physical notes.

10) Fraud

The Digital Rupee can help prevent fraud. While the current system relies on post-facto checks
to prevent fraud, CBDC could address this proactively with embedded programmability and
regulated traceability.