The Reserve Bank of India launched CBDC that is Central Bank Digital Currency and made its entry into the world of Blockchain and Wallets. Think of this simply as an online version of our physical currency. It’s a digital banknote. See, normally, the RBI would have to print notes and then hand them over to the banks to circulate them into the system. It could be cumbersome. But with a CBDC, the RBI can simply ask people to open digital wallets and issue new digital notes to them directly. It can be a direct infusion of cash and gave it a name as e-rupee.

Every bank has its own application on play store and Appstore named as [Bank Name] e-rupee. A user will have to install application of bank with whom he has his account with. All the applications have a same UI/UX and process to register. It will hardly take 5 minutes to register and create a CBDC wallet. A user can load money into the wallet in denominations similar to actual currency that is 2,5,10,20,50,100,500,2000. Pay to users, merchant wallets using a QR code or wallet address.

Anyway, they ran a pilot project for a year. Just to test the waters and see if people were amenable to using this sort of digital cash. And while we wouldn’t call it a resounding success, we guess it was enough for the RBI to say, “Alright, it’s time to take it to the next level.”

And guess what they have in mind now? A programmable e-Rupee! Wait…what does that mean, you ask? Well, the simplest way to put it is that we need all kinds of tech to be able to issue and manage this digital money—think fancy blockchain-level tech. Now you can use this tech and set up a smart contract that’s built into this cash that says, “This digital cash can only be used for xyz reason.” It gives a specific purpose to the digital money. That’s programmability. And you could programme it for a whole host of use cases. For instance, if you’re thinking of extending cash to farmers so they could buy fertilizers, then you could technically programme the e-Rupee in such away that it could only be used to buy fertilizers and nothing else. Or you might think the rural economy is flatlining. That’s what most FMCG companies have been crying about today. And since consumption is one of the biggest drivers for India’s growth, you might worry. So you’ll send some digital rupees to the rural folks. And include a rule that allows them to spend it only in a supermarket to buy foodstuff.

Fig: Agricultural grant is misused by farmer by spending it on non-Agricultural Activities.

Hack, you could even set an expiration date for the money. You could transfer money to people’s accounts and tell them that if they don’t spend it within 30 days, it’ll be worthless. And no one likes to waste free money, right? They’ll be forced to spend it and maybe that can give a boost to the economy.

Now, you could argue that you don’t need an e-Rupee to do this in reality. And you’d be right. For instance, back in the 1930s, many parts of the world were affected by a massive economic slowdown. And some economists proposed a crazy idea—physical cash would be affixed with a special stamp. But the stamp meant that the holder of the cash would have to bear a periodic fee. So people tried to spend this cash and get it out of their hands as soon as possible. And because money changed hands quickly and created demand, the Austrian economy soon started prospering again. But doing this exercise with physical notes can be an expensive proposition. There are going to be added costs for the ‘limited edition’ stamps or physical currencies. But in its digital format, it becomes that much easier to implement. And if you think about it, it’s a dream scenario for a central bank. They can adjust their monetary policy more easily. Right now, they have to tweak interest rates if they want to control money. The thinking is that when interest rates are cut, it becomes easier for people to borrow money and spend. But then, the RBI has to wait for banks to actually transmit these rates to customers. And banks can often take their own sweet time. This doesn’t help monetary policy at all. So the problem here is that the RBI can control the price of money (interest rates) but they can’t control the velocity of money. But with a CBDC, that changes. By setting specific use cases and a timer for the money, they can control the velocity of spending too. Quite crazy, huh? Now you might have a question—Doesn’t this violate the principle of fungibility of money? See, fungibility means that all money is the same. With ₹100, you can buy a packet of cookies on Swiggy. Or you can buy five bottles of water from your kirana store. You’re free to use it as you please and whenever you want to. But if you set rules saying that the ₹100 can only be used to buy bread, it loses that feature, no? It’s not fungible anymore. And if you add more rules saying that the money will self-destruct in 30 days, then fungibility is dead and buried. But looks like the RBI doesn’t necessarily agree with that. When Deputy Governor T Rabi Shankar was asked about it, he launched into an example which we have edited for clarity.

“Let’s say a school has given money to a student who won a prize to buy books in a particular bookshop. So the student can only use this money for that purpose. But as soon as the book is purchased and the currency goes to the bookshop owner, it becomes fungible again. So it’s only for that period the fungibility of money becomes limited. If the student chooses not to spend the money, it goes back to the school and it becomes fungible again. So programmability does not militate against fungibility but rather, just puts it on hold.”

That seems like an unambiguous lens through which to view the matter, don’t you think? Once the purpose is met, the money is set free. The fungibility exists only for a brief period. So we can’t quite complain about that.

We tried to create a MVP for what the government is aiming to do in near future with the CBDCs. Following is the technology used to create the MVP.

ERC20 - a standard for creating and issuing smart contracts on the Ethereum blockchain

Solidity- to write smart contracts

NextJs- Frontend Development

The Subgraph- Transactions database management and authentication

Scaffold-ETH - NextJS, RainbowKit, Wagmi and Typescript.

Anon-Aadhar: Zero knowledge based Aadhar authentication.