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What should infrastructure for digital rupee look like? Here’s what SC Garg has to say

In this article, former Finance Secretary SC Garg traces the origin of currencies and explains why it’s time for India to move over bitcoins and towards digital rupee

  • Three generations of currencies — coin rupee, paper rupee and digital rupee can continue to exist, albeit very soon, the bulk of currency could be in digital rupee

  • Crypto-currencies created have fallen by the side as currencies. Most guys who launched crypto-currencies have shuttered their businesses

New Delhi: The rule of East India Company (EIC) had spread over large tracts of India by 1835. It included three Presidency Towns of Calcutta, Bombay and Madras and also a lot of other territories. Three Presidency Towns were minting silver coins that circulated in their areas performing the function of currency. Many princely states also minted their metallic coins. These coins contained different quantities of pure silver. There was considerable confusion about the relative value of different circulating coins.

The EIC decided to accept the silver coin circulating in Bombay Presidency as the standard coin, gave it the name of Rupee and declared the Silver Rupee as the legal tender in the entire territories of India controlled by EIC.

First-generation Indian currency — the Indian Rupee — was born. It was a metallic coin currency. It had a standard weight of 180 grains with standard content of 165 grains of pure silver and 15 grains of alloy.

It was the standard currency minted and circulated by the government of the day- the East India Company. The Central Banks did not exist in the World at that time. India did not even have a good presence of banks at that time.

Operation of silver rupee as currency in India    

The Silver Rupee became standard currency all over India soon, though it was declared legal tender throughout the territories of the East India Company. The Calcutta Mint minted silver rupees as per the demand of the currency. The value of the coins of other princely states got fixed with reference to the relatively pure silver contained therein.

India mints also issued gold coins — the mohur. Its value was fixed in terms of the silver rupee. 15 rupees to a gold mohur, reflecting the gold-silver ratio of 15:1.

Silver rupee operated on a classical metallic standard. Rupee contained 165 grains of pure silver. Conversion of bullion in silver rupee and vice versa was freely permitted. A mint charge was levied whenever anyone wanted to get his silver bullion minted into rupee to cover the cost of minting. It was also no crime if the rupees were melted and converted in bullion. Quantum of rupee in circulation was determined by the demand for coins needed for the smooth conduct of trade and other financial transactions.

Limitations of Silver Rupee Gave Birth to Paper Notes

The limitation of the silver rupee had started being felt in a few years. Most significant was the inconvenience in use for large value transactions and for payments to be made over distances. India is a vast country. India was also majorly an agricultural economy. Peasants preferred to sell their crops upon receipt of silver coins. The weight and volume of silver rupees posed problems in safe and cheap transportation. Human ingenuity always finds solutions. Necessity is the mother of invention.

Respectable merchants started taking silver coins and issuing paper promissory notes convertible in equal value of silver rupee on demand. Traders who trusted the merchant or the banker would exchange silver rupees with such promissory notes on paper.  

Paper currency notes become legal tender in 1861

The government realised the need for issuing paper currency notes convertible in silver or silver coins on demand. In 1861, the government decided to issue paper rupees, fully convertible in silver rupees, which continued to be the primary currency. The first paper currency rupee was issued in 1862. The silver rupee currency continued to be India’s standard currency until 1893.

Issuance of paper currency was backed by Paper Currency Reserve consisting of silver, gold and silver coins. The 1861 Indian Paper Currency Act, however, provided that a small part of the paper currency reserves could be held in the form of securities issued by the Government of India. The 1861 Act fixed the limit of such securities at Rs. 2 crores. This came to be known as the invested portion. 

Rupee currency notes equal in value to silver rupees came in circulation and became greater and greater portion of the rupees in circulation. The government kept the promise of converting the rupee notes in silver rupee coins.

As the ‘invested portion’ started rising on account of various factors, it started becoming difficult for the government to honour the promise. Then the penny dropped in 1893.

The Government decided to close the mints to free coinage of silver. The people would not be allowed to bring any bullion for getting minted into silver coins. Likewise, there would be no more conversion of paper rupees in silver coins.

India had opted for silver metal standard in 1835. With the closure of mints to free coinage of silver, India decided to go off the metal standard. This heralded the end of era of first-generation currency in India. It was the end of silver standard and the end of the standard silver rupee.

Second-generation currency: Rupee note exclusively

Closing of mints to free conversion between coin and bullion began the process of tokenisation of silver rupee. Tokenisation of a metal-based currency signifies that the value of the metal contained in the coin is lower than the nominal money value of currency assigned to such a coin.

Paper rupee is a complete token. Value of paper of a Rs 10 currency-note sold as scrap will not bring anything. Metal coins can circulate only as token coins. When the currency is off the metal standard, it becomes token currency. While silver contained in silver rupee coin and paper in the paper rupee will yield different values if sold for the commodity contained therein, both are token currency as both yield less value than the monetary value assigned to it.   

India started on the second generation of currency — the token currency in 1893. Silver coins continued to be minted in India even after 1893. However, the proportion of paper currency kept on increasing. The invested portion of the Paper Currency Reserve, which was fixed at Rs 2 crore in 1961 was raised gradually to Rs 120 crore in 1920. Absolute maximum limits of the invested portion was indirectly done away in 1920 by prescribing that the metal portion of the Reserve would not be less than a proportion of the total reserves.

Minting of silver coins was gradually reduced. The paper currency became the main currency in circulation. In 1940, the silver content in the silver rupee coin was reduced to half of full weight of coin, i.e. 90 grains. Finally, in June 1947, the minting of silver coins was totally stopped. From then on, paper currency has been the exclusive currency of India.

The minimum metal portion of currency reserves was abolished at some stage. There is no requirement of minimum gold or silver to be kept as part of the reserves. In India today, currency notes of about Rs 25 lakh crore are in circulation. The value of gold with the RBI is less than Rs 2.5 lakh crore.

Reserve Bank of India takes over notes issue in 1935

Exactly 100 years after the first standard pan India silver standard rupee was issued, the Reserve Bank of India was formed as a privately owned Central Bank in 1935.

Note issuance which was carried out by the Government in the Department of Issue and through Reserves Treasuries and Circles in the country was taken over by the RBI. The RBI has an Issue Department, which manages and accounts for the currency in circulation. The rest of the operations of RBI are part of the Banking Department.

Minting of silver rupee stopped in 1947. Coins are still minted in Government mints. Coins were of small denominations post stoppage of the silver rupee. The coined currency became a small convenience token currency totally. Later, coins were introduced for relatively larger denominations. Re 1 coin held fort for long. Coins of Rs 2, Rs 5 and Rs 10 were introduced. Recently, the government introduced Rs 20 coins as well. Coins are not found very convenient by people to undertake transactions. Only about 1 percent of currency in circulation — about Rs 25,000 crore against notes in the circulation of Rs 25 lakh crore — is in the form of coins.

The silver standard died in 1893. Silver coin died in 1947. Paper rupees of different denominations have become literally the currency.

Digitalisation of payment transactions

Money or currency intercedes to complete trade and other financial transactions. Paper currency is lightweight and easy to carry. It can be assigned any monetary value as well. India had a Rs 10,000 rupees note in 1947.

Paper currency suffers from a major drawback; it has to be physically delivered. This shortcoming was overcome substantially by the arrival of banks. You can deposit your paper currency or cash in your bank account. Thereafter, you issue a cheque for making payment.

However, the cheques have to go through a long process for realisation. The banker of the cheque issuer had to send it to the banker of cheque recipient or to a clearinghouse. If the parties are in two different cities or in different countries, the process of realisation was still tortuous and longer.

The advent of digital technologies has resolved this problem as well. The adoption of core banking technologies allowed every bank account to become a digital account. The creation of market infrastructure like the National Payment Council of India (NCPI) has converted all digital bank accounts in India into digital wallets in a single bank.

You can make all payments on your mobile phone or computer. Most payments are instantaneous. Digital technologies have removed all limitations of paper currency.

It is estimated that more than 90 percent of all payment transactions in value in India take place digitally now. However, over 80 percent of transactions in the volume are still estimated to be conducted in cash by way of exchanging currency notes. Currency notes are performing the function in the digital world today what coins were doing till some time back in the pre-digital world of paper currency.

Currency is still paper rupee

Currency is the manifestation of money but money is more than currency.

Physical currency in circulation and currency as deposits in saving and current accounts are as good as currency in circulation. In the digital world, deposits perform payments faster than paper currency payments. There is a difference, however, between the two. Currency note is the currency. Deposits can perform payments which are the main function of currency. Deposits are money but not currency. Deposits can be converted into currency.

The rupee banknote is still the currency.

Crypto-currencies seek to change basic form of currency

Bitcoin came into the world sometime in 2009. It is a crypto-currency. It has no physical form. It is computer code in the database of crypto-universe of bitcoin. Bitcoin operates as a currency when the ‘crypto-currency in computer code’ is transferred from its holder to another. Along with crypto-currencies, came another innovation of distributed ledger technology or block-chain for generating and exchanging currencies.

Everyone, who owns a part of the bitcoins in the distributed ledger, knows which computers own how much of bitcoins. It is not that you know about the rupee notes in your wallet. In the world of crypto-currencies, you know how much is in your crypto-wallet, what is the total size of all the wallets and which computers hold how much in its wallet.

The invention of crypto-currencies mark a revolutionary departure in the evolution of currencies. From the metal coin currency to paper currency, you now have the prototype of digital currency — the currency which has digital form, not a physical form. The currency which exists in the form of computer codes and not any fiat printed on a piece of paper.

A crypto-currency is different than digital payment in paper currency. Digital technologies use digital applications to make payment in currency which continues to be in paper form. A cryptocurrency is a digital currency which by its very digital nature is used to make payments in digital form. Digital currency is different from digital payment.

The arrival of crypto-currencies has presented opportunity before the world to see whether it is time to progress to the next generation of currencies — the digital currency.     

Private crypto-currencies can never become currencies

The driver for creation of crypto-currencies has been to find a solution for the problem of international payments and transfers in the world of a multiplicity of national paper currencies.

Innovators of crypto-currencies thought that they could create a currency that would have its value. Payments can be made at this value. Most of the cryptocurrencies were launched in the US and the relative value of such crypto-currencies to the US dollar can be determined in terms of its price to dollar.

The value of currencies was relatively easier to be determined when it was metallic currency. A dollar or sterling or rupee had a certain amount of pure gold or silver in the coin. If a currency had twice the gold contained in the currency of another, it was twice the value of the other currency. If two coins had similar weight but one contained gold and another silver, the relative value could be determined in terms of the relative price of gold and silver. Even when paper currency was on a gold standard, it was easier to determine the relative value. If India assured that its rupee was convertible into 5 grams of gold whereas a dollar was convertible in 10 grams of gold, a dollar would be equal to 2 rupees.

There were numerous problems with the metallic world of currencies. There were also innumerable problems with countries claiming or fixing the value of their currencies in precious metal. The world went off the gold and silver standard.

It is a herculean task to fix the relative value of numerous currencies in the world of today. How much Chinese Yuan equals 100 Rupees? How much Brazilian Lira equals 100 Rupees? Some currencies are convertible; others are not. Currencies are convertible for some payments but they are not convertible for other payments.

It is a mess. However, you have to have some fix for the problem. US dollar works as that fix today. As more than 80 percent of global trade is denominated and settled in US dollars and US dollars are available in most of the countries of the world, market exchange rates to the dollar, howsoever imperfectly determined, works as the relative value of currencies.

The market exchange rates don’t necessarily represent the real exchange value. The Economist has been publishing what is known as Mac index — what a Mac burger costs in local currency in different countries of the world gives a relative value of these currencies. There are several imperfections in the Mac index as well.

The World Bank came up with the idea to determine the cost in US dollars of the poverty line in different countries by finding out how much a set of consumption baskets would cost in different countries. This gave relative purchase power parity (PPP) value of each of the currencies. It indicates a wide variation from the nominal exchange rates. 

The system has proved to be quite complicated in practice but serves a useful purpose.

Cryptocurrency guys thought that they can create a digital currency using computer codes whose value would depend upon computing power and effort involved in the mining of transactions. There is no connection with real economies — production of goods and services and trade therein — and the relative exchange values of hundreds of currencies in the world.

Moreover, anyone could create crypto-currencies. The value of currency is linked to the volume of currencies, the velocity of currencies, and the value of output in the country. The world of crypto-currencies created by private innovators has no limitation on the volume of currencies and has no connection with the global output.

The result was foregone. Crypto-currencies created have fallen by the side as currencies. Most guys who launched crypto-currencies have shuttered their businesses. Bitcoin is the only real survivor. This is also because people see some novelty in the crypto-currency as a commodity or as an asset. It has also some scarcity value as the total number of Bitcoins is fairly limited in number.

Private crypto-currencies have no chance of survival as currency.

Digital Form of Rupee

While private crypto-currencies have no chance to survive as a currency, their innovators have given birth to the idea of digital currency.

Several Central Banks are working on a potential digital currency. China Central Bank recently announced that trials of such a digital currency will start in a number of identified cities in China.

The Committee set up by the Ministry of Finance recommended draft legislation for dealing with private crypto-currencies. It also recommended the exploration of the idea of ‘digital rupee.’

Let us be clear that we are discussing digital rupee, not digital payments. Digital rupee will replace physical paper rupee as currency. As coins continue to be used for making some payments, the paper rupee would continue to be useful to make some payments. Like coins are convertible in paper rupee, the paper rupee would be convertible in digital rupee and vice versa.

Three generations of currencies — coin rupee, paper rupee and digital rupee can continue to exist, albeit very soon, the bulk of currency could be in the digital rupee.

The private crypto-currencies created so far have used a computer code to create currency and distributed ledger technology to hold the currency and undertake transactions therewith. Conversion in real paper currencies is possible both ways.

Appropriate computer code in a technically sound manner assuring the uniqueness of each unit of currency will create the necessary currency stack. There is another easier and more familiar way to create a digital currency stack. It is dematerialised technology. If the currency notes, which have a unique identity are dematerialised, the digital version of physical rupee notes can be created easily.

Rupee in dematerialised form can move to be the next generation of rupee — the digital rupee.

Form of Digital Rupee

The biggest property of currency is its free, instantaneous and effortless circulation. Distributed Ledger Technology (DLT) or blockchain technology is quite costly. The holders have to invest a lot of money in creating computing capacity to hold the entire stack of crypto-currency. The transactions also take a lot of time and effort to convert into new blocks.

A much easier form is to create digital wallets. Everyone holds physical money in the pocket or wallet. The physical wallet is required to hold physical currency. The digital wallet will hold digital currency.

It is easy to create and carry a digital wallet. It can be carried on the mobile phones which are ubiquitous now. It can be carried on a cloud with a code to access it anywhere. The digital wallet can be accessed on the system of a vendor also when you intend to make a payment for a purchase.

Transfer from one wallet to another wallet has become extremely easy. In the world of digital payments today, this is happening in millions of transactions every day. Even the most illiterate of people can conduct such transfers effortlessly for even very minuscule payments.

Digital rupee can be created in a single unit of one rupee. It is easy in digital mode to make payment of any amount in units of one rupee.

Demat rupee in a digital wallet is our digital rupee — the next generation of the rupee.

Digital Rupee Solves Problems of Paper Currency

The paper rupee note system has innumerable problems.

Transactions require parties to come into contact. Rupee notes cannot be carried in large value as the largest note is of Rs 500 only. You have to keep notes of several denominations to make exact payments. For making payment of Rs 156, you have to have a 100 rupee, a 50 rupee, a 5 rupee and a 1 rupee note. As one-rupee notes are not commonly available, you have to use a one- rupee coin. Carrying 15-20 notes and a few coins in your wallet or pocket is quite irksome. If you get a few coins or lower denomination notes as a return while making a payment, you do feel miserable.

The currency also acts as a store of value. Large-denomination notes are more amenable to be used for shoving under the mattress to hide ill-gotten money or for making payments of unaccounted for transactions.

Paper currency notes are prone to be counterfeited by enemies.

Digital payments have shown the way for making digital payments. Digital currency can do the remaining work of replacing the use of paper currencies by digital currencies.

It is time for India to move on to a digital currency system?

It makes no difference in the conduct of monetary management. The system of digital rupee does not make any difference in the authority and management of money by the Central Bank.

The work of getting physical rupee notes printed, stored in currency chests, receiving soiled notes, and destroying them etc off course gets eliminated. The RBI would continue to issue currency in the Issue Department. It will only be a digital currency. The rest of the operations in the Banking Department would remain unaffected.

The banks would have to carry a much smaller number of currency notes and coins as the system moves towards more and more use of digital currency. Citizens would be able to keep their incomes and extra digital currency notes in their deposit account with the banks as usual.

Transferring to and from deposit accounts to digital wallet would be a child’s play.

It is time to move to the digital rupee system of currency. The digital rupee should be created in demat form and transacted through digital wallets.


This article is an excerpt from a blog post written by Garg on his website. Garg is a 1983 batch IAS officer of Rajasthan cadre. He has served as Economic Affairs Secretary and Finance Secretary of India. He also headed the committee responsible for drafting the infamous bill to ban cryptocurrencies in India.