Safeguarding e-Rupi from misuse: The challenges ahead

E-RUPI, payment system, digital payment instrument, Transaction transparency, central bank digital currency, CBDC, Reserve Bank of India, RBI, physical currencyTo enhance the scope of digital payment systems like e-Rupi, a central bank digital currency (CBDC) is needed.

India has taken a big leap towards digital transactions with the launch of e-Rupi by the Reserve Bank of India (RBI). A successful implementation of the e-Rupi would not only curb black money, but would also ensure documentation of spending the currency as well, as the digital payment is allowed only on a list of authorised transactions.

“One of the biggest advantages of e-Rupi is that it is completely contactless and paperless, and because all transactions are digital, monitoring and tracking usage can be carried out very easily to ensure that there is no misuse. Via Aadhaar linked identification, the government can monitor that service providers deliver actual services intended for beneficiaries as opposed to cash-based benefits. The digital payments boom has largely been in the delivery of private goods and services. The e-Rupi payment product has now effectively leveraged the digital payments architecture for delivery of public goods and services,” said Shilpa Mankar Ahluwalia, Head (FinTech), Shardul Amarchand Mangaldas.

To enhance the scope of digital payment systems like e-Rupi, a central bank digital currency (CBDC) is needed. Such a currency will be governed by the RBI and would be backed by physical currency.

“A CBDC will fundamentally change India’s payments ecosystem. It is important to understand that a CBDC is distinct from a payment instrument that enables digital payments; these are essentially all backed by physical currency sitting as deposits with a bank or a licensed payments entity. A CBDC on the other hand will itself be issued in a digital form and “stored” with the RBI. A CBDC may not necessarily be convertible into physical currency. Significant use and adoption of a CBDC will consequently mean a wholesale shift to digital payments, fuelling the already growing boom in digital payments,” said Ahluwalia.

Talking on impact of such a digital currency on the banking system, Ahluwalia said, “A key macro question is how a CBDC will change the role and functioning of banks and other licensed payment operators. The Fintech platforms powering digital payment solutions will likely develop newer products linked to use of CBDC. As consumers shift to CBDC, banks, however, may be faced with lower deposits which will have significant implications for the credit and financial market.”

E-RUPI: How will it affect the payment system in India?

However, to prevent misuse and to safeguard the e-Rupi or a CBDC, the RBI needs to have a proper framework in place.

“The RBI will also need to think through several legal implications when developing a framework: for instance, what is the level of KYC to be undertaken when issuing CBDC (and who will undertake these processes), will transactions be anonymous (as is the case for physical currency), and whether CBDC can be used for both retail and wholesale payments. The introduction of a CBDC will certainly trigger a new spurt of innovation in digital payments, linked largely to the design choices that the RBI makes when evolving a framework,” said Ahluwalia.

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