The idea of currency and money is being disrupted by cutting-edge technologies that promise to change how money exchanges hands in the 21st century. The race for developing national digital currencies is gaining momentum, fueled by the birth cryptocurrencies that challenges the monopoly and autonomy of central banks on the economy altogether. The Republic of China is leading the race to develop the first major digital currency in a bid to reshape its economy by modernising the national currency, Renminbi, one of the world’s major reserve currencies to curb the vices of money-laundering, counterfeiting that plagues its society and to dominate the world both strategically and financially in the coming years by overhauling its foundations.
China is not alone in this race, a survey by the Bank of International Settlements indicates that the majority of the central banks are exploring a national digital currency and the Reserve Bank of India has made clear that it has plans to launch Digital Rupee currently under the research stage. The question is whether India is lagging, and do we need to win this race in the first place or learn from the mistake of others? The answer to this is two-fold and is based on examining the technology underlining it and considering the endless possibilities that impact the society and the Indian economy itself.
The debate proposes that the creation of Digital Rupee solves a lot of problem India is currently facing. A digital rupee solves the problem of counterfeiting banknotes; a colossal complication that is fueled by the political interests of nations such as Pakistan and its backed terrorist organisations. A digital rupee dismantles the ploy and ambition of Pakistan as an electronic rupee by ensuring the immutability and authenticity of money without the apprehension of alteration, tampering or counterfeiting.
Further, Digital Rupee would curb money laundering and tax evasion as blockchain technology enables secure monitoring and reporting. On-chain analysis of transactions is going to ensure better fraud and money laundering detection and prevention, as authorities would be able to monitor the transactions in real-time and report any anomalies as they find. Digital Rupee will make it difficult for people to park money away from the eyes of income tax authorities and would enable better analysis and reporting of financial transactions that cross jurisdictions.
Thus, the advantages of a national digital currency are endless because it disrupts illegal activities and removes problems that plague our “economic reality.” The current coronavirus pandemic has only accelerated and made this race more critical as governments fear that the being behind the curve is going to harm its economic and political interests. Therefore, the Reserve Bank of India needs to move with confidence and caution in mind. The belief that the technology offers solutions to various illegal economic activities that hurts the Indian economy but with the warning that a haphazard implementation of a digital currency would only lead to severe financial consequences. That may devalue the national currency, increase inflation, or hurt foreign exchange reserves held by the Reserve Bank of India.
The Race for Digital Yuan – Tale from China
Internationally, the People’s Bank of China is winning this race as the central bank recently announced that the prototype of the digital currency is almost ready. The bank is adopting a mix of blockchain architecture and centralized databases to provide for high throughput and scalability of transactions to cater to its large population and network of retailers. The digital currency launched by PBoC will have a two-layer system where the central bank will be the sole creator of the currency with mixed levels of centralization and decentralization to distribute the digital currency among all the citizens, banks, corporations, and other channels as it deems fit. This is going to change the course of the economy for China in the coming years as the country would be able to modernize all aspects of its digital economy and fight with problems such as tax evasion, money laundering and counterfeiting of currency notes which still affects millions of Chinese every day.
Libra a stablecoin that made the US Senate standstill
The corporate giant Facebook also came with its plan of launching Libra a stablecoin backed by a basket of fiat currencies to be used by its users to send money seamlessly across borders without the hassle of getting through a money exchange, forex exchange, etc. Even though the Senate tried to derail its plan when they realized that Libra could potentially disrupt the payment markets worldwide, thereby remove its monopoly over the economy. Still, the dream of Libra is not dead but currently navigating the regulatory challenges thrown before it. Nevertheless, US lawmakers recently introduced the concept of Digital Dollar to provide US citizens stimulus payments to tackle the impact of the economic the recession of COVID-19 even though the idea got scrapped after some time. Two new bills introduced by lawmakers cover the concept of creation of the digital dollar and challenges regarding the regulatory framework for adopting blockchain technology.
A lot to gain for India
Digital Rupee can solve a lot of problems faced by India, such as tax evasion, counterfeiting of notes, and money-laundering. Regulators and government authorities can track the full history of transactions executed through the digital currency. Advanced machine learning and big data analysis to detect better, deter and limit frauds and other malicious activities that run the shadow economy. The creation of digital rupees will put a long-term hold on the efforts of Pakistan to counterfeit Indian national currency to finance drug smuggling and terrorism activities in India. Only the Reserve Bank of India would have the authority and ability to create and distribute the digital currency as it deems fit.
A blockchain-based architecture will ensure immutability, authenticity, and verifiability of transactions made through the digital currency. It will ensure that adversaries would not be able to magically replicate or counterfeit rupee as the digital currency developed by the RBI would work on a distributed-cum-centralised-blockchain that would be encrypted cryptographically and verified by a network of nodes participating as validators. The mechanism of authenticating transactions through a distributed network of nodes before adding the transactions to the block, thereby forming a chain of transactions, would ensure that any type of malicious transaction will not be able to penetrate the network as the decentralized network would ensure that no single point of failure exists. Thus, the opportunities and benefits of digital currencies for India are endless; the only question is, should the Reserve bank of India proceed with caution?
The Burning Economy: Lessons from Venezuela
It is not the first time the government and regulators worldwide are pushing for the idea of incorporating digital currencies. In fact, Venezuela was one of the first countries that launched Petro a digital cryptocurrency backed by Oil, to save its economy amidst the political and economic crisis destroying the country. The purpose of the currency was to circumvent the sanctions imposed by the USA back in 2017 and to act a currency with less inflation as compared to the Bolivar. The government viewed oil-backed digital currency as a liberator that could stop the hyperinflation and end poverty in the country. President Maduro offered Petro to Vladimir Putin. The Russian government refused to accept Petro as a unit of exchange. The actions of Maduro, as reported by Wired, received criticisms as Venezuelan Crypto exchanges reported very little trading activity and some indicated that Petro does not exist at all, as the company backing its Oil reserve, PDVSA was in $45 billion debts.
Further, Maduro’s actions to delegitimise international laws, treaties, and sanctions put by the security council only further destabilized the economy of Venezuela. The digital currency backed by barrels of Oil and reserved by PSDVA was a sham as the company embroiled itself in a debt cycle, unable to repay its debt. Thus no physical asset or commodity was backing the digital currency, which proved to be a recipe for economic disaster.
Digital rupee can be a blessing for the government only when it is implemented through research, sandboxing, and pilot programs to test the currency within a small range of controlled environment. The advantages of a national digital currency simply outweigh the risks associated with it. The authorities can develop a thorough digital currency with the right mix of decentralization and centralization, product development, and research that questions and answers every aspect of blockchain technology, cryptography, and principles of economics. Deep-down research and testing will ensure that a technical or economic disaster does not happen in the future. The central bank would have to address challenges related to how the currency would be governed, distributed, who will validate the transactions, who will report and monitor such transactions?
Would the data be available to the public, or would it be a closed network? The questions are many and only a time-based cautious approach of learning, collaborating, and researching with regulators and authorities worldwide can solve the concerns regarding digital currencies. Only then the dream of an Indian digital economy would become a success. Thus, even though the Reserve bank of India is already working and researching on the concept of digital currencies, it should move slowly doing all its calculations and due-diligence on the aspects of technology, economics and the societal impact.
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)