The case for an emergency digital Rupee

By Vivekdeep Gupta
Vivekdeep Gupta, Country Head, India at R3 on why an emergency digital Rupee could enable effective fiscal stimulus...

As the world begins to emerge out of the most ferocious stage of the Covid-19 pandemic, India and economies across the world will have to contend with its economic consequences as well. With many of the traditional monetary policy approaches largely impossible, R3's Vivekdeep Gupta argues that a ‘digital Rupee’ could play a useful role in enabling effective fiscal stimulus that reaches those most in need.

Whenever we are discussing the current global health crisis, the first thing we must always do is to recognise the scale and extent of the human tragedy which this disease has brought to families across India and beyond. Yet, sadly, even if transmission rates can be kept under control and a vaccine can eventually be found and distributed - both significant challenges in their own right - the effects of this pandemic may be felt by ordinary families for a long time to come.

Not only is this pandemic an unprecedented health crisis, but it comes at an economically unprecedented time as well. Policymakers both in developed and developing economies are running out of ideas. Central banks in developed economies have been running record low interest rates for over a decade now as economic growth has been slow and at times unstable. Many times they have moved to more direct forms of stimulus, such as quantitative easing. However, those actions are increasingly being derided as ‘bailing out banks’ by publics which are becoming more suspicious of their political class and the institutions of the state, including central banks.

In developing economies, like India, the problem is different – lower interest rates are not effectively being transmitted to end consumers, especially those in the most vulnerable sections of society, defeating the very purpose of the policies. Additionally, the room for major fiscal stimulus has been reduced by slowing growth rates and revenue shortfalls. Consequently, any new measures introduced to stimulate the economy now or in the near future will need to be maximally effective. There is little leeway for error.

Governments across the world have been considering ‘helicopter money’ stimulus as one possible response to a potential recession. The problem with this is that, while their simplicity and direct reach to ordinary citizens make them politically appealing, there is little evidence such programmes are effective. For example, evidence from the US, which tried a direct stimulus measure of this type in 2008, found that less than a quarter of people issued with cheques actually spent them and even those who spent the money arguably did not spend it on the sectors that would have benefited the economy.

At first glance, it might not sound like blockchain technology has much to contribute to solving this challenge. However, the ability to create purely digital, programmable money, transacted and distributed in a direct peer to peer system raises some extremely promising possibilities for maximising the effectiveness of the fiscal stimulus.

One of the most interesting features of a ‘digital Rupee’ would be the ability to ‘programme’ the money. What I mean by this is the ability to control how and where that money can be spent and, once the crisis is over, potentially revoke it as well. For example, at an individual level, we might want to ensure that some or all of the stimulus is spent locally on essentials like food.

At the firm level, a digital emergency Rupee opens up for the first time, an ability for the Government, to do a targeted stimulus. For example, it becomes possible for the Government to ensure that a micro, small and medium-sized enterprises (MSME) stimulus be spent on payroll or clearing specific vendor dues. All this could be ensured by simply writing it into the code of the digital currency. Unlike a voucher or one time DBT, it becomes possible, as the situation changes over time, to update this code and change these stipulations ongoing to respond to new challenges in the economy. Furthermore, in order to encourage receivers of the money to spend it and limit the risks of inflation, it could be easily withdrawn at the end of the crisis.

Another important aspect of a digital rule delivered through blockchain is the ability to make the system peer to peer. With the Indian banking system already under stress, many of the neediest people in society are also layering on their bank’s risk on to the stimulus money received from the government. Even before the COVID-19 crisis, non-performing assets have an increasing feature of the Indian banking sector for some years and many of the biggest players in the space have gone bankrupt as a result. For end users, this makes the prospect of keeping their cash under the guardianship of many banks one that could result in them inheriting an extra layer of risk that they don’t need.

A blockchain based peer-to-peer Digital Rupee allows for a direct form of transfer from the Government into a user controlled wallet which can avoid the banking system and allow for individual citizens to receive a digital Rupee that is truly backed and trusted by the Government and therefore ‘cash-like’.

From an implementation perspective, India is better placed than most countries in the world to launch such a digital Rupee. Aadhar already identifies each individual which makes it possible to map a digital Rupee wallet to each Aadhar number thereby completely eliminating the challenges associated with onboarding users through traditional banking channels. The access to this digital Rupee can then be made available through phone-based wallets or directly to the user through biometric authentication on the AePS network. 

When we talk about blockchain-based currencies, many people still think about bitcoin, Etherium or perhaps Libra. But the truth is that central banks across the world, from the Bank of England and Federal Reserve to the Monetary Authority of Singapore and Bank of Thailand, are actively exploring the use of digital currency.

It seems likely now that this technology will soon be mainstream. Until then, however, central banks and governments should consider whether this technology can contribute to their efforts to tackle these unprecedented challenges we now face in India and beyond.

For more information on business topics in Asia Pacific, Australia and New Zealand, please take a look at the latest edition of Business Chief APAC.

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