Our previous post discussed how the Digital Rupee works and how it differs from UPI.
And as we always say, new technology always tries to fix the issues with the old one. But only some pass in this pursuit. Does Digital Rupee pass the quest?
Let’s dive deeper and analyse the problems associated with the Digital Rupee and its potential to replace cash.
Estimated read time: 3 minutes and 30 seconds
Buckle up. Here we go!
Before we dive deep, recap on the Digital Rupee.
The Digital Rupee, also known as the E-Rupee, is a digital currency backed by the Reserve Bank of India (RBI). It operates in the virtual world, facilitating transactions, payments, and money management via digital wallets in our smartphones.
Unlike physical cash, it resides in the digital domain, requiring no tangible form.
The Digital Rupee uses blockchain technology to make transactions secure and transparent. But remember, it’s not a decentralised currency. RBI has complete control over it.
The promise of convenience by the Digital Rupee
The Digital Rupee, much like other digital currencies, boasts the promise of convenience. With just a few clicks on your smartphone, you can make transactions, pay bills, and manage your finances seamlessly.
The hassle of carrying physical cash, storing cash, standing in long queues at ATMs, and counting change becomes a thing of the past.
However, it’s essential to recognise that this convenience comes with its own set of challenges.
1. Security and privacy concerns
One of the most significant concerns surrounding the Digital Rupee is security. While digital transactions might seem secure because of encryption and authentication mechanisms, they’re not immune to cyber threats.
Hacking, phishing, and data breaches could lead to unauthorized access to your digital wallet, resulting in financial losses and compromised personal information.
Many people may argue that even cash has a security issue, but cash doesn’t have a privacy issue.
The shift to a digital currency raises questions about privacy.
Every transaction you make using the Digital Rupee leaves a digital trail. This could potentially expose your spending habits, preferences, and even your location, posing a threat to your privacy. Unlike physical cash, which offers a certain level of anonymity, digital transactions are more traceable.
Imagine it. RBI would know where you spent every single rupee. This data will be stored in the blockchain, and RBI can look at your historical spending at any time.
Now, RBI has announced that they are working on introducing some level of anonymity for low-amount transactions, or they will allow users to delete transactions if they choose to keep them anonymous. We have to wait and watch how the central bank will solve this problem.
2. Dependence on technology
Another concern to ponder is the heavy reliance on technology. While smartphones and internet connectivity have become universal, not everyone has equal access.
The elderly, rural populations and those with limited technological literacy might find it challenging to adapt to digital transactions. This digital divide could further marginalise certain segments of the population, worsening financial inequality.
Though, RBI has announced that in the future we will be able to make offline transactions similar to UPI lite. And they are trying to reduce the friction created by technology. But all these features come with their own limitations, which we never faced with cash transactions.
3. Financial exclusion
While the Digital Rupee aims to make transactions more accessible, it’s crucial to remember that not everyone has a bank account or access to the necessary digital infrastructure.
For those who rely on cash for their day-to-day transactions, this transition could create barriers, making it harder for them to participate fully in the economy.
Initially, RBI announced anyone can access the Digital Rupee wallet without any bank account. But as of now, in the pilot, you need to link your bank account with the wallet to gain access and add money to your digital Rupee wallet.
In cash transactions, banks didn’t have any data on your spending. But through linking bank accounts to the Digital Rupee wallet, they may receive additional data on your spending. For this reason, a segment of our population wouldn’t like to use the Digital Rupee.
Will the Digital Rupee replace cash completely?
The question on our minds is whether the Digital Rupee can completely replace cash in the near future. While the idea is appealing, it’s essential to be realistic about the challenges we’ve discussed.
Digital currencies might supplement cash transactions, but a complete replacement might not be as smooth or inclusive as we hope.
Does the Digital Rupee fix the issues we face with physical cash? To some extent, yes. But they also introduce their own problems.
The trade-off between convenience and the risk of cyber attacks, privacy breaches, and financial exclusion raises its own set of challenges.
We haven’t covered all the issues related to Digital Rupee yet. Only focused on the top issues. Will try to cover more problems and solutions related to Digital Rupee as we come across them.
That’s it for today, buddies. Stay tuned for more insightful newsletters on personal finance topics that matter to you.
Remember to share these insights with your buddies. Until next time!
If you are like me, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
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