Context:
With increasing digitalisation of payments in India (UPI, NEFT, RTGS), terms like digital money and smart money are gaining prominence. These concepts are important for understanding India’s financial ecosystem, fintech growth, and digital governance.
What is Digital Money?
Definition:
Digital money refers to money that exists only in electronic form and is stored in bank accounts or digital wallets. There is no physical form like cash involved in digital transactions.
Examples:
- UPI payments (PhonePe, Paytm, Google Pay)
- Net banking (NEFT/RTGS/IMPS)
- Debit/Credit card payments
- Online wallets
Key Features:
- Exists as electronic bank records
- Facilitates cashless transactions
- Backed by traditional banking and RBI regulation
- Easily transferable via digital platforms
- Physical cash usage declines as digital money adoption rises
What is Smart Money?
Definition:
Smart money is programmable digital money, where conditions can be set on how and when the money can be spent.
Explanation:
Smart money uses technology to control usage, such as time limits, merchant restrictions, or purpose-based transfers.
Examples:
- Parents send money to children that can be used only in school canteen
- Government welfare money restricted to buying only fertilizers and seeds
- Corporate expense cards usable only at partner merchants
- Blockchain-based programmable cryptocurrency transactions
Underlying Technology:
- Uses blockchain and smart contracts
- Cryptocurrencies like Bitcoin and Ethereum first introduced programmable money
- Now used in fintech, CBDCs, and welfare schemes
Relevant Prelims Points
| Term | Description |
| Fiat Money | Money backed by government order (legal tender) |
| Digital Money | Electronic form of fiat currency |
| CBDC | Central Bank Digital Currency – issued by RBI |
| Smart Contract | Self-executing code on blockchain enforcing terms |
| Tokenization | Converting assets into digital tokens |
Relevant Mains Points
- Smart money improves targeted delivery of subsidies (DBT).
- Helps curb leakages and corruption using programmable restrictions.
- Supports fintech innovation and digital financial inclusion.
- Raises concerns of privacy, state surveillance, and cyber security.