“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.” – Former Finance Secretary Subhash Chandra Garg
In his latest blog, former Finance secretary Subhash Chandra Garg writes about the need for Digital Rupee as the new generation of Money. He explains the history of Indian Rupee, how digital currencies came into existence, why (private) crypto-currencies will not survive, outlines how a Digital Rupee can solve paper currency problems and concludes it with “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.”
Subhash Chandra Garg led charge of the inter-ministerial committee deliberating on regulating cryptocurrencies in India. The committee eventually recommended a complete ban on Cryptocurrencies like Bitcoin and Ethereum with a jail-term for violating the ban. A draft bill was published in July 2019 which has not been tabled in the parliament yet. If chatters are to be believed, the government will be looking at relaxing the clauses recommended by the committee.
Mr. Garg tweeted his opinion on why the ban was justified, shortly after DEA published the recommendations. He took charge as the Power secretary in the last week of July before voluntarily retiring on October 31, 2019.
Garg blogs occasionally on the monetary policies and steps that the government can take to improve or achieve the Economic targets and they are very insightful. Keeping up with the tradition, the latest post in the bureaucrat’s blog is a history lesson on India’s monetary policy and the move to make INR a fiat currency not backed by any asset. The blog becomes slightly problematic when it talks about cryptocurrencies and pushes a few assumptions that we will discuss further, but once again catches drift as Garg recommends a move to Digital Rupee. In a shocker, he does not recommend Blockchain.
How Paper Currency Became Fiat Currency in India
Garg sums it up well in the introduction, “As paper currency grew in circulation to take care of economic transactions and metal reserves started becoming lesser and lesser as a proportion of currency issued, it was felt why continue with the promise to convert the paper currency into metallic currency at all.”
The East-India company in 1835 brought the Silver Rupee in circulation, along with a Gold “Mohur” that was equal to 15 Rupees. Putting silver to Gold ratio as 15:1, which today in 2020 is looming around 110:1. It goes to show how important and valuable Gold has been for ages, even more so now.
Between 1835 and 1861, the silver rupee started showing limitations, while paper currencies began gaining popularity in form of Promissory notes. “Respectable merchants started taking silver coins and issuing paper promissory notes convertible in equal value of silver rupee on demand”.
First paper currency rupee was issued in 1862. Each Rupee note was equal to 1 Silver Rupee. The silver rupee currency continued to be India’s standard currency until 1893.
The 1861 Indian Paper Currency Act, 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, known as invested portion.
This invested portion grew further until 1893 when the government wasn’t able to manage it further and decided to stop the mints and move out of Metal Standards.
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 metal contained in the coin is lower than the nominal money value of currency assigned to such a coin.
This is how the seeds for the first non-asset backed INR were sown. Eventually coins that were not of the exact metal value and paper notes that were truly backed by metals became the norm and in 1935 RBI took over currencies in India.
The bleak reality summed up by Garg in one sentence, “Silver standard died in 1893. Silver coin died in 1947. Paper rupees of different denominations have become literally the currency.”
Paper Currency to Digital Transactions
Some of the kids in today’s world won’t even know what Cheques are if they are in India of course. For some reason, US and other countries still use cheques widely and call it checks.
We know we can send money to any account in India in a blink of an eye with not less than five methods available at any given point of time. Wallets, UPI, NEFT, IMPS, RTGS are terms we know more than we know that sugar is the real cause behind obesity and not consumption of fat itself.
Despite millions of digital transactions across multiple banks and institutions, the physical cash still exist and is very much the only true currency in India. And then Garg locks and load his main armament to fire from the shoulders of Cryptocurrencies like Bitcoin.
Digital Rupee and not Bitcoin
Garg’s blog explains Bitcoin better than many other Bitcoin hobbyists, but he gets a couple things wrong.
Most of the crypto currencies were launched in US and relative value of such crypto-currencies to US dollar can be determined in terms of its price to dollar. Justifying this statement with the “Dollar Standard”, that USD is a global exchange currency and hence Crypto is denominated to the USD by entrepreneurs a bit of a stretch.
Most of the cryptocurrencies are launched in Asian countries infact and not the US. Most people actually shy away from the US due to unclear regulations and fear of retaliation.
Garg also wrote Crypto-currency guys thought that they can create a digital currency using computer codes whose value would depend upon computing power and effort involved in mining of transactions. Garg says Cryptocurrencies can never have economic values because they were created in the aforementioned way. However, if I as a person want to value a digital currency, I should be able to. Ironically, Garg started his blog explaining the barter system.
In a democracy should we really stop the citizens from exchanging values in the form of their own choice of currency, importantly when it is not a sovereign currency? One of our partners say, “Bitcoin is not Money of the internet, it is the internet of Money”, and who can truly regulate the internet?
Nevertheless, Garg goes further to say “Moreover, anyone could create crypto-currencies. Value of currency is linked to the volume of currencies, velocity of currencies and the value of output in the country. The world of crypto-currencies created by the private innovators has no limitation on volume of currencies and has no connection with the global output.”
We cannot really disagree with Garg here, perhaps a free market supporter would say, they have no right to stop the entrepreneurs.
Now this is where Garg’s Bias is visible. For the most part of the article, Garg substantiated each argument with numbers and data. He explained Bitcoin better than many, but when he had to argue why Bitcoin has survived so far, his arguments are void of data points and relies simply on scarcity of Bitcoin.
“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 are fairly limited in number.“Subhash Chandra Garg, Former Finance Secretary
Bitcoin has performed better than any documented asset or currency in the mainstream, but the only real survivor gets an argument that most economists wouldn’t even care to wonder about.
How to Build a Digital Rupee?
Garg says, Digital rupee will replace physical paper rupee as currency.
“As coins continue to be use for making some payments, paper rupee would continue to be useful to make some payments. Like coins are convertible in paper rupee, paper rupee would be convertible in digital rupee and vice versa.
Three generation of currencies- coin rupee, paper rupee and digital rupee can continue to exist, albeit very soon, bulk of currency could be in digital rupee.”
Garg’s recommendation to create a digital rupee is to create in a Dematerialised form. The demateralised technology was used to convert Paper shares into Demat shares that are traded on the markets in India and stored in Demat Accounts.
Garg’s argument against using Blockchain is that it is expensive to maintain the currency stack, in Bitcoin terms, he means it is expensive to run a node. Hence, he recommends to create digital wallets. Everyone holds physical money in the pocket or wallet. Physical wallet is required to hold physical currency. Digital wallet will hold digital currency.
Demat rupee in digital wallet is our digital rupee- the next generation of rupee, writes Garg.
Garg ends the post by advocating that monetary policy remains unaffected but the work load to collect and dispose soiled notes is reduced and banks have to carry less paper currency.
Do you think a Digital Rupee is required? Let us know in the comments below.