On February 1, Finance Minister Nirmala Sitharaman announced the birth of a new monetary creature within India’s financial landscape. In the annual Budget speech before the Parliament, the minister said: “The introduction of central bank digital currency will give a big boost to the digital economy. Digital currency will also be a cheaper and efficient currency management system.”

I am a doctoral student of Indian currency and by strange coincidence, at that very moment, I was writing about the Paper Currency Act passed by the colonial government in British India in 1861. James Wilson, a British politician and founder of The Economist, is credited with conceiving the Act. His words were not so different from the Finance Minister’s.

Wilson wrote that in addition to the “great advantage of a well-secured paper currency in economising the capital of a country”, paper currency will “effect considerable savings”. He further argued that shifting to a paper currency would reduce the cost of a mint, save the costs of replacing worn coins, and, provide public convenience because of easy transmission.

Paper currency

At the time of Wilson’s writing, people living in the Indian subcontinent were no strangers to paper as monetary media. In the 18th and 19th centuries sarrafi (banker) paper was ubiquitous. The hundi, chithi, parca all forms of paper were exchanged with velocity as were diverse metallic coinage. While coins carried the signature of sovereigns for the most part, paper bore the signatures of sarrafs.

Early colonial banks like the Bank of Hindostan (established 1770) and the Bank of Calcutta (established 1806) started to issue rupees as a paper note that was convertible to coin. But in 1861, as a result of Wilson and others’ efforts the Paper Currency Act barred banks from issuing rupees as notes. Instead, the Act relocated government treasuries to Presidency banks and asked the banks to issue paper notes on behalf of the government. As shareholder corporate entities, banks were external to the government and yet could be controlled and audited by the state.

Old Bank of Bengal building in Calcutta in 1900. Photo credit: Unknown author/ Wikimedia Commons (Public domain)

By “economising the capital of a country” what Wilson implied was that the colonial state could expand its fiscal canvas to generate wealth from trading the treasury’s money. This would be above and beyond the income from revenue and profits from mints and other public ventures.

A paper note could replace a coin and that coin could be used to generate returns from securities and debentures. In other words, paper helped to securitise the government treasury. Further, it could ensure timely payments called “Home Charges” to London.

The implementation of the Act was a clumsy and uneven process, however, in hindsight, the paper rupee began to acquire public confidence across British India only in the 20th century. The words “I promise to pay the bearer…” are a legacy of that potential to convert paper to coin.

But the transition in 1861 tied the rupee to public credit and introduced a paper rupee with sovereign signature, a new shift in monetary media. This transition, not surprisingly, was designed in the arcane corridors of the Government of India’s Financial Department and the Bank of Bengal in Calcutta. At the time there was no Indian Parliament, no Reserve Bank of India, no civil society think tanks and certainly no Indian subjects were consulted by the colonial government.

But, uncannily, 161 years later, India’s transition to state-issued digital money, or the digital rupee, seems to be taking place within the arcane corridors of the Department of Finance. The rupee that we know is a liability of a commercial bank, which is backed by the Reserve Bank of India as a lender of last resort and issuer of notes.

Ten rupee bank note (1865). Photo credit: Reserve Bank of India Museum

Digital money

The digital rupee will be a direct liability of the Reserve Bank. Hence, this is a change in both the form of the monetary media itself – from paper to virtual – and also within the institutional arrangements that create our monetary material. A deep structural change like this one warrants a parliamentary committee and a Digital Currency Act that is properly discussed in Parliament. Meanwhile, the Data Protection Act is still in the wings and the status of the Cryptocurrency Bill remains unclear.

Digital money is not the same as digital payments. In the case of digital payment, it is only the mode of payment that changes. Instead of presenting physical rupees, a transfer is noted from your bank account to the payee when you purchase something via a debit or credit card or e-wallet.

A digital payment is like a digital cheque, a set of instructions, that are then processed by your bank and payment provider. A digital rupee, or any digital fiat currency, does not necessarily have a physical correlate.

In fact, the idea is to over time reduce physical cash from circulation. This money is mined as a virtual coin by the Central Bank, each coin with a unique identifying number recorded in a centralised database. The website of E-Naira in Nigeria, for instance, says that “customers can use an E-Naira wallet” to make payments. The question here is whether the Central Bank is also becoming a payment provider at scale. Are we all about to become customers of the Reserve Bank of India via our mobile phones?

Money is a human institution. It has always been embedded in social conventions. In our present context, it is via law and institutions like banks that credit becomes the money that we all use. If we are moving to an entirely new form of money – as a medium of exchange, a store of value, a unit of account, a form of payment – we need to understand and participate in this shift.

What social relations are we losing and which ones are we gaining? The rise of paper as currency was accompanied by, in fact, made possible by, banks. A digital fiat currency could possibly reduce the role of banks in the future leaving an enlarged reserve bank. What is the legal basis for this new monetary creature? At the moment there is none.

It would be naïve to imagine that the digital rupee will immediately find success and not have any problems, the pains of demonetisation are still fresh. The government must genuinely create space for consultations. The Federal Reserve Bank of the United States has opened up debate via a public comment process and has said it will not move ahead on the Digital Dollar without Congressional approval. The European Central Bank has announced a two-year exploratory period and is considering a cap of 3,000 digital Euros per person so as not to destabilise the commercial bank system. We are unclear about what consultative process will take place here.

Questions remain

Many questions perhaps will be discussed at the market level: the role of commercial banks, interest rates, risk of fraud and large-scale hacking, among others. And then there are questions that concern citizens in the near and long term: what will be the ratio of paper money to digital money in circulation? How will this ratio change over time? If the digital and the physical rupee are exchangeable at par who will exchange them for us? Will offline payments be possible? If in the next twenty years we are looking at a bigger central bank than ever, what parliamentary accountability mechanisms can we put in place? What about the privacy and protection of citizens in this virtual financial landscape? What are the environmental costs of digital rupees?

Involving banks and the financial market is necessary but if citizens are not involved at this crucial moment of transition, money might become – not more egalitarian as is being promised but – more cryptic than ever.

Historians may not make claims on the future, that gift of fortune-telling is reserved for economists. But historians of money can tell you that monetary revolutions are messy processes and cannot be enforced only through bureaucratic ordinances. Monetary media takes time to gather collective confidence.

Its value has been determined by social relations and collective trust, not just the technology of production – metal, alloy, paper, ink, presses, ledgers or centralised databases.

The words on your rupee that say “I promise to pay the bearer…” were retained even as paper was unhinged from metal, as a remembrance of the obligation that the sovereign’s bank owes you. We are yet to see the digital rupee but I doubt it will retain the language of promise.

The author would like to thank Bhavani Raman, Associate Professor, Department of History, University of Toronto, for her comments on a draft of this article.

Shweta S Banerjee is a Vanier Doctoral Scholar at the Department of History, University of Toronto.