This question has the potential to yield so many different answers and there’s a possibility that all of those answers might be correct. Some answers would be logical, some would be emotional and some would be personal and some revolutionary. There is no single answer to this question. But after Budget 2022 which lasted as long as a football match, wherein one of the star players was ‘Digital rupee’, we explore what money actually is. As we prepare to enter a lot of different ages, age of the meta, age of the digital, space age, are we also about to enter a new age of money?
An answer that might come readily to you would be that the 100 rupee note kept in my pocket is money, you are right. But as has been long discussed, at the end of the day it is nothing but a fancy printed piece of paper. Lots and lots of papers get printed round the world, some having Mahatma Gandhi’s photo on them, some having Benjamin Franklin’s. Along with the headshots of these great men, you might have noticed some numbers on them too- 10, 20, 50. When you think of it, those are pieces of paper. When you think of it that is exactly what happened during Demonetization in 2016 when the two highest denominations of 500 and 1000 became useless paper overnight. And in absolute terms less useful than bread, butter, brick, milk and water. But why have these pieces of paper been the cause of wars and have decided power dynamics around the world? These types of currencies are called fiat money which means they hold no value on their own, but just because a government has regulation in place, it carries value.
Okay, so now we have come to terms with the paper being of value. The next dilemma when it comes to money, is the money in your bank account. Your bank account balance. If your bank balance says that you have 14,256 rupees, this does not translate to you actually having 14,526 worth of notes kept somewhere. It is just a promise that your bank keeps, and hopefully never breaks.
Yes, there is money which has intrinsic value and is called commodity money. Gold for example has a value of its own because of its rarity. And can be and has been used for transactions. Throughout history various such commodity money have been used like silver, copper, tea and even salt (from where come the Hindi sayings of kiska namak khaya hai and namakharaam)
Okay so now it is known that there has been money with intrinsic value. Digital rupee is one of those that has no intrinsic value, you can’t even see it feel happy about the volume. Digital rupee is the digital form of our regular currency which will powered by blockchain technology and managed by the central bank. Also there is no wear and tear like notes and coins. So it is just another form of fiat currency and is going to be different from the decentralized currencies like Bitcoin and Ethereum.
Are we moving towards a world where the definition of currency yet again changes?
India is one of the front runners of the world when it comes to currency and control. Recent reforms like UPI and digitizing transactions have made India a trailblazer when countries are still using cards and cash. It is completely possible now that you can get all things done if you don’t have cash on hand, you can get petrol filled, buy groceries and eat an ice cream, this was unheard of as recently as 10 years back. We are making large strides with money.
The government in its recent budget introduced a 30% taxation on Virtual Digital Assets and then introduced a Digital Rupee. The technical terminology being used for this is Central bank Digital Currency or CBDC which is going to a legal tender of a different form but is going to be exchangeable with cash. A lot of countries have tried experimenting with CBDC but only a handful of few have actually moved past the pilot stage. The Indian government does not want to stay behind and wants to be a part of this revolution.
RBI mentions that the payments using CBDC’s would be final and would reduce settlement risk in the financial system. This means that a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over. This eliminates the need for inter bank settlement. CBDC enables a real time and cost effective globalization of payment systems and time zone differences would not matter. A person sitting in India can pay somebody sitting in USA in real time in digital dollars/rupees without an intermediary. This transaction gets completed then and there and would not require the interference of the US Federal Reserve System for settlement. Which removes the risk of foreign exchange trade not being settled called Herstatt Risk.
To get some sense of this global topic, money can be called a store of energy. We gain that energy by doing something that someone else wants but the recipient doesn’t have something that we want. For example: Akshay wants to create a website for his shop, Abhishek codes and creates his website. Now Abhishek is a fan of bats and cameras, which Akshay doesn’t have. That is why Akshay gives him ‘energy’ that Abhishek can use elsewhere to get what he wants.
When the sun sets, it can be said, the more money one has, means that the person has worked longer, harder and smarter (not always), which they can use to get more goods they desire. That being said, Money itself is not good, bad or evil, it is just a promise of storing and exchanging energy. How much energy do you have?