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Monday / March 27.

If RBI launches an e-wallet, would you make an account?

Moving towards digital economy

By Prof. Jayanth R. Varma

It is my view that if India wants to replace cash with digital payments, it must be prepared to issue a digital device to every Indian and simply absorb the fiscal cost of doing so. The alternative is a tiered payment system with high quality payments for those with smartphones, a second tier solution for those with feature phones and a broken model for those with neither. Such a tiered payment system that makes some Indians second class citizens in their own country is fundamentally irreconcilable with our democratic values and with the constitutional guarantee of legal treatment.

None of the present e-wallets have a legal backing equivalent of cash from RBI.

None of the present e-wallets have a legal backing equivalent of cash from RBI. | Photo Courtesy: Techstory.in

Cash gives the poorest of the poor access to a retail payment system that meets the gold standard for payment systems: real-time gross settlement in central bank money. It is unacceptable to give them anything less than this in a digital solution.

Settlement in commercial bank money or other inferior forms of money can be a choice, it can never be a compulsion.

I might voluntarily choose to adopt a Paytm wallet or a bank wallet and take the credit risk that the wallet provider might fail; but I should not be forced to do so as the price for participating in digital payments is quite high.

Way Ahead:

Substitute cash for official e-wallets

Introduce electronic money in the form of an official e-wallet. 

The Reserve Bank of India should introduce electronic money on its own in the form of an official e-wallet because only an e-wallet filled with central bank money can replace cash. This would also solve the problem of interoperability between different wallets. A core function of the central bank is to be the “tender of the tender” – the issuer and maintainer of legal tender of the country. A central bank that abdicates this responsibility forfeits its raison d’être.

Economy-wide provision of digital devices

Issue a digital device that allows first class access to the digital payment system.

Every Indian must be issued a digital device that allows first class access to the digital payment system. There is room for bringing the cost of this device down by careful design that pares it down to just its core functionality. I would think that a starting point for this might be something like the Raspberry Pi which is enough of a general purpose computer to run at least a bitcoin SPV client. The Raspberry Pi costs about $35, but a suitably pruned down device manufactured in truly large-scale might cost only $20. Giving one such device to every Aadhar card holder might cost about 1.5 trillion rupees.

In my view, this cost is affordable for a country at our stage of economic size and development, and is also quite reasonable in comparison to other big-ticket fiscal expenditure (for example, large defence contracts, infrastructure projects or subsidy schemes). It is perfectly fine for you to take the opposite view that this cost is unacceptable. What you cannot do is to use that view as the justification for building a great payment system for the elite at the cost of taking away from the poor what they have today – a payment system (cash) that allows them to settle in real-time in central bank money.


Prof. Jayanth R. Varma is currently teaching Finance and Accounting at the Indian Institute of Management, Ahmedabad, India. He has been a full time Member of the Securities and Exchange Board of India (SEBI) for over a year and currently is a director on the Board of Infosys BPO Limited and Gujarat International Finance Tec-City Company Limited.
This article was originally published on Prof. Jayanth Varma’s Blog
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