Last month, Chinese President Xi Jinping
announced that China should ‘Seize Opportunity’ to adopt Blockchain at the Political Bureau meeting of the Central Committee. Overnight, ‘Blockchain’ was catapulted into the mainstream with academic institutions introducing educational courses and blockchain search results on We chat and Baidu hitting the roof. The crypto community around the world celebrated this announcement as Bitcoin
surged by over 40 percent – third highest single day rise in a decade since existence.
What this really means for China is anyone’s guess, but most experts believe this shall
pave the way for ‘Digital Renminbi’ which has been in the works for a few months ever since Facebook’s announcement of Libra – a price stable cryptocurrency backed by fiat reserves governed by the Libra Association. Soon after its whitepaper launch though, Libra was
criticised around the world by politicians and bankers alike. It was stalled in the US for presumably making inroads into the sovereignty of their national currency. China on the other hand, is moving at breakneck speed by
passing a cryptography law that will come into effect on 1 January 2020.
Mark Zuckerberg, Founder & CEO of Facebook, in a recent congressional hearing
pitched Libra as the United States’s best bet to counter China’s Digital Currency push to undermine the US Dollar for global trade. He cited China’s plans to use Digital Renminbi on the back of their tech giants Alibaba, Tencent and others as part of the ambitious Belt and Road Initiative (BRI), that aims at increasing Chinese dominance in global affairs through a revival of the ancient maritime and land-based Silk Routes.
As a new digital currency war between the east and west brews, India needs to take a progressive stand in order to counter the threat from the Digital Dollar and Digital Renminbi. The Reserve Bank of India (RBI) has been skeptical about permission-less digital currencies like Bitcoin due to issues of money laundering and capital flight. While these are legitimate fears, the government's move to cut off the crypto community from the banking system and proposals to severely punish holders of crypt-ocurrencies has squashed any innovation in this space. Such adverse regulatory conditions have pushed Indian companies engaged in crypto currencies and cryptography research to
move their operations abroad, while China has been strengthening its intellectual property – as of today, China holds over 71 patents for its Digital Renminbi project.
Digital Rupee for Digital India
With Reliance Jio adding 200 million new Internet users this year, India is poised to be the second-largest digital nation without a strategic plan to counter the new digital currency threat. While, BHIM UPI
crossed a billion transactions last month and has been an unprecedented success, from a technology standpoint, it is just a money transfer mechanism between banks using existing IMPS payment rails. What India needs is a new paradigm in banking, which can reinvent the age-old banking model and usher a new financial revolution by enabling new-age technology companies to participate in providing financial services to everyone. Just as China is pushing for the Digital Renminbi, India needs a Digital Rupee.
In the past, the RBI has encouraged innovation by allowing payment gateways, wallets, payment banks and finally BHIM UPI, which brought hundreds of millions of users into the mainstream economy. This ‘cyclical disruption’ created new category leaders in every cycle and provided incentives for companies to drive digital payments. Digital Rupee, built using blockchain technology, will encompass all these previous cycles, while also creating a framework for a ‘Unified Banking Interface’. This new financial revolution using a Digital Rupee has the potential to dwarf the current fintech wave which in its current form resembles mobile phones before the launch of the iPhone.
But first, to understand the importance of a Digital Rupee, we must
distinguish the digitalisation of fiat currency from digital currency. The digitisation of fiat currency stems from the advent of electronic payment and interbank IT systems, allowing commercial banks to more efficiently and independently generate the credit flows that expand broad money supply. By contrast, digital currency, enabled by blockchain technology, affects the base currency allowing the central bank to bypass commercial banks and regain control of currency creation and supply end-to-end.
For too long, the dollar has been unchallenged as the world’s reserve currency giving the US leverage over the world’s financial system and also enabling it to impose sanctions against countries. The recent trade war was a rude awakening for China which is now pushing for a more advanced financial system using Digital Renminbi. India runs the risk of being caught up in the whirlwind of a proxy digital currency war as the US and China battle it out to gain supremacy across other markets by introducing new-age financial products. Today, a sovereign Digital Rupee isn’t just a matter of financial innovation but represents a push back against the inevitable proxy war which threatens our national and financial security. This also provides an opportunity for India, which is poised to be the third-largest economy within a decade, to leapfrog and establish dominance of Digital Rupee as a superior currency for trade with its strategic partners, thereby reducing dependency on the dollar. India should expect significant friction from US and China as it climbs the charts towards economic and financial dominance and be prepared to counter it strategically.
Digital Rupee will not only make the MDR debate obsolete (as payments and financial contracts will be built in) but also make cashbacks, remittances, loans, insurance, stocks and other financial products a natural extension using programmable smart contracts. It will reinvent the idea of a core banking system on the back of which Infosys and TCS became the world’s largest software outsourcing giants. Today, fintech companies are restricted by what’s allowed and possible with cosmetic changes to banking products with huge customer acquisition costs. Unlike current financial products that work in silos and create walled gardens, Digital Rupee will be programmable at its core with open source infrastructure. This will turn every large technology company into a fintech company without the need for permission or partnership with a bank. This shall result in unprecedented innovation by upending the existing banking model and creating new incentives for companies to bank the unbanked, while also providing financial services to those who have been at the mercy of public sector banks till date.
Blueprint for the future
As the government and the central bank take stock of the situation, they have two models to implement the Digital Rupee – Private sector-led Libra or Central Bank-backed Digital Renminbi. While both models have their own advantages and disadvantages, the right model for India might be a combination of the two – a Public Private Partnership (PPP). This would require public and private sector companies across Telecom, Retail, Technology and Financial services to come together and create a unified Digital Rupee under the guidance of the central bank. As this is likely to be a strategic initiative, it would require the formation of an independent body similar to the National Payments Corporation of India (NPCI) to create the technology backbone and enable proliferation of the Digital Rupee with complete impartiality. The last thing such a strategic initiative needs is multiple attempts by private companies to create their own versions of the Digital Rupee.
While the RBI mulls over the Digital Rupee, it needs to realise that Digital Rupee empowers the central bank by providing them direct tools to control monetary policy and also helps them in safeguarding the interest of deposit holders. Directly influenced creation and supply flow using a Digital Rupee will immediately reflect the effects of policy changes instead of relying on commercial banks to make those changes when they deem fit. Most importantly, it will empower the regulators to monitor transactions and credit flow across the economy helping them weed out scams and fraud instantly and secure depositors’ money. This is in sharp contrast to how the RBI currently monitors regulated entities with internal and external audits which in many cases are misreported, resulting in scams.
This is important as confidence in the banking system has been falling. In a recent
report, McKinsey found that a majority of banks globally may not be economically viable adding that their business models are flawed, and the sense of urgency is acute. The recent NBFC crisis resulting in the current downturn in the economy and the PMC Bank scandal which has locked out depositors from withdrawing their funds due to high NPAs are testament to the fragility of our current banking model and monetary policy.
With cash in circulation
20 percent higher since demonetisation, which was a move to fight black money and create a cashless economy, the Digital Rupee presents another shot at achieving the same goal. Digital payments in their current form are unable to compete with cash irrespective of the convenience they provide since cash is seen as a way to make completely private and immutable transactions. A radical approach towards opt-in privacy using zero knowledge proofs for transactions up to a certain limit, with a transaction tax built in, can create a digital cash equivalent which in its current form even Libra and Digital Renminbi will fail to achieve. The creation of a Digital Rupee is an opportunity for India to empower its citizens and enable them to use it freely in our ever-expanding digital economy and break free from an outdated banking system. It’s time India considers Digital Rupee as a matter of national security and sovereignty.
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