Summary reflection:

As a happy user of UPI, I think is incredible. I want it to be more resilient, from our national economic standpoint. A (small as possible) fee, judiciously applied, will hopefully create generally constructive back-pressure on the digital side of the cash economy.

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Why the oxymoron; "digital side of the cash economy"?

Zero-cost-to-consumer one-rupee instant transaction system is basically cash economy. Because, at least here in India, our so-called "informal sectors" have switched wholesale to it in Metro to Tier 2 cities. Significantly in Tier 3 cities and smaller towns. And non-uniformly across rural / village panchayat areas.

UPI, and indeed, digital transaction uptake essentially hews close to the availability of reasonably reliable grid electricity and mobile Internet connectivity and access to banking services. The abundance of low-cost UPI-capable devices is useful only if these precursors are useful.

Reasonable fee as an economy-scale tuned mass-damper.

I hope the result of applying merchant-fee-as-back-pressure, at any size of transactions, translates into a sizeable up-tick in hard cash transactions. Nations of people that want to remain sovereign and democratically-run, ought to incentivise heterogeneity of money flow mechanisms. Especially, they/we, the people, must ensure, through our democratic influence as citizens, that a sizeable portion of the/our economy is person-to-person hard cash transactions.

And this provides a measure for "is the fee punitive?". Let's say, hypothetically, India's money supply mechanism is resilient if about 75% of money supply is digital, and 25% is hard currency. Anything outside this envelope is tending towards punitive costs on the people, both as tax payers and as transaction-fee-payers. Our central bank could manage the money mix, through judiciously tuned per-transaction fee on UPI and other digital payments, not unlike managing the volume of banknotes in circulation. The digital printing press is infinite money, if the effective fee is zero (psychologically). Sometimes, you want to make the fee zero, to bring it all into balance again, but most times, you want to create some friction to keep it from becoming a nation-state level attack vector (whether self-goaled or externally inflicted).

Crypto currencies and/or CBDCs are emphatically NOT the answer for such resilience.

I'd go so far as to argue that those forms of currency undermine (pun intended) sovereign economic resilience, where "sovereign" includes the little guy as much as it does a multinational or a country.Crypto system infrastructure is brittle by design and construction. Its effective use is predicated on the magical availability of wildly complex planet-scale electrical and communication infrastructure, not to mention dedicated tending-to of fast-decaying compute hardware, by literally every single participant in the network. A USB stick of gold-brick valued crypto, buried in the backyard is not at all equivalent to a brick of solid gold buried in the backyard.

Digital money systems make top-echelon black-box corruption easy. Hard cash makes it hard.

Recent years have made it patently obvious that digital-first money flows are wide open to centrally-controlled and/or monopolistic manipulation by individuals in power.

Consider the logistics of managing USD 1M in small bills. Hell, even USD 100 bills because 1M of those is about 10 Kilograms of paper mass (or about 22 pounds for you non-SI enjoyers (why?)). Now you need a large handbag, or a cool trench coat with several large pockets.

Multiply 1M in USD 100 bills, by 1,000, for billion-dollar corruption. That is 10,000 Kg of paper bills alone [0]. Now, add to that, the industrial pallets, containers, and packing material to hold it all sensibly. Let's say 1,000 Kg for each such cash pile.

Further, add to that the real-world infrastructure and organisational capacity to construct, maintain, secure, transport, and otherwise manage the infrastructure needed to hold and deploy your USD 1Bn in hard cash. This staggeringly capital-intensive exercise is subject to economies of scale.

These facts of life make it that much harder for anybody, especially enemy nation-state actors, to physically perpetuate large-scale money-supply based corruption of the kind being increasingly perpetuated by individual people, in private and public life, because they are able to exercise state-level power over digital economies.

Furthermore, currency notes are ridiculously hard to counterfeit --- AFAIK Indian banknotes (and US ones) are among the most secure (as in transaction-trust-secure) forms of monetary exchange humans have crafted.

Printing and injecting those into an economy at scale, to launch an inflation-attack requires nation-state level capacity at multiple levels, and the geopolitical incentive to do so. And if they do, it does not remain surreptitious for long.

Co-opting money systems, especially crypto-currencies to private ends and/or a offensive economy-destabilising tools, is trivial in comparison. You don't need to launch a 51% attack on the ledger. You just need a big enough psychological spanner, delivered into everyone's infinite brainrot feeds, to make 'em believe in The One True Currency; one that benefits you personally the most, obviously...

Obligatory XKCD: "Security" https://3d.xkcd.com/538/

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[0] More paper-napkin arithmetic: https://www.ehd.org/science_technology_largenumbers.php and https://goodcalculators.com/money-weight-calculator/ etc... (no affiliation to any of them).

(edit: fix typos, add clarifications, maybe I should have made an actual blog post... my publishing workflow isn't indieweb enough yet, sorry :'))