India (via the Reserve Bank of India) plans to issue a Digital Rupee.
A distinction needs to be made between the government’s proposed digital rupee and other crypto currencies (Bitcoin etc.). The first will be issued by a sovereign while others are issued by private parties. Similar to the physical rupee, the digital rupee will not be backed by anything except the government guarantee to honor it and will be equally and proportionately subject to value fluctuations due to macro-economic reasons – current account deficits/surplus, interest rate changes, etc.
Primary difference will be that while the physical rupee will exist in the offline world, digital rupee will exist in the online one. Another critical difference will be traceability – unlike the physical rupee whose movements can’t be monitored, digital rupee can be tracked every step of the way. In effect, issue of a digital currency by any sovereign is simply the recognition of increasing relevance of the online world, specifically the increase of retail online commerce.
How does the digital rupee compare with other crypto currencies like Bitcoin etc.? Broadly money has three distinct uses: – 1) medium of exchange, 2) unit of value and 3) store of value. Historically, gold satisfied all three criteria before the advent of physical currencies. Just like the physical rupee, all three will also be satisfied by the digital rupee. But, can a private crypto currency satisfy these? No one prices anything in Bitcoin. Few retailers accept it. And it is a poor store of value, because its price can fluctuate by 20-30% in a single day.
More importantly, on a broader level, we need to understand that money is merely the invention of inter-subjective reality (reality that is man-made yet accepted by all). All money in the world does not physically exist. Even “real” money is only specially made paper printed with black ink on different color backgrounds. What backs this money is not gold or something of intrinsic value, but rather the collective belief that money has value because it had to have such value. Thus, the monetary system of India and every other country in the world is entirely an exercise in psychology, a convergence of acceptance by all in their respective minds.
Money is simply a matter of communal faith. Holders of this faith includes everyone – from the head of the government to the governors of the central bank to the common man. Whether the “powers that be” truly believe they understand all this is irrelevant. It is their job to keep things moving, to make the belief-structure real and tangible. Central bank governors are trusted, in the same distant way that people trust their godmen and gurus, to maintain the structure on which worldly faith always depended, proclaiming the reality of something that could not be seen, but manifests in an edifice whose physical manifestations were found only in temples and central bank buildings.
No private crypto currency can replace this edifice.
Milan is a veteran stock market investor and educator on equity investing. Connect with him on email@example.com
You must be logged in to post a comment.