Smart Rupee: Transformation at the core

The govt and RBI have played a pivotal role, along with private players, to make India’s retail payment systems one of the most advanced

The Smart-Rupee is a non-disruptive way of ushering virtual currencies into the Indian economy and bring transformative changes in the Banking system. The Rupee-centric approach obviates the need for a new national crypto-currency or adoption of the decentralised ones.India has seen much innovation and advancement in retail payments, particularly in customer convenience and financial inclusion.

NPCI’s UPI, seamless payments, mobile banking and wallets, QR codes, P2P lending, neo-banks, and recently launched e-RUPI vouchers are some initiatives.Fintech start-ups have leveraged technology to improve customer experience and reach out to underserved segments.

The planned New Umbrella Entity (NUE) for retail payments infrastructure development is expected to open the infra space to private players, fostering innovation and developing it further.

The Government of India and RBI have played a pivotal role, along with private players, to make India’s retail payment systems one of the most advanced in the world.With the push given to the retail payment space, should the RBI, with its planned Digital Rupee initiatives, be now focusing on the wholesale and core Banking segment?

Save my assets

Recent developments in the Indian banking sector underscore the need for tighter controls and more transparency. Early warning systems that instantly flag incongruities will shield lenders’ assets which can rapidly deteriorate into liabilities and Non-Performing Assets (NPAs).The credit risks and broader economic impact make it imperative that a transformative change is envisioned at the core of the banking system.

The advent of Blockchain and other technologies has brought some novel concepts and digital asset management techniques to the fore.

Cryptocurrencies deliver benefits like instant domestic/international settlements, immutability, security, and high availability. Proponents ofCryptocurrencies are urging the Central Banks to authorise Bitcoin and other cryptocurrencies as legal tender.

Central Banks, in general, are in no rush to make such assertions, as they gauge the value and impact of the new tender. Decentralised Cryptocurrencies, by definition, are not under the purview of a Central Bank or its monetary policies. Central Banks like to control the economy but have no levers to monitor usage, manage Money Supply, Price and Liquidity of the decentralised entities.

The price volatility of Cryptocurrencies is driven purely by public demand, sentiment, speculation, and machinations of wealthy investors. The Money Supply is either in-elastic and managed by algorithms based on crypto-economic principles -- or under the direct control of the Management of the company that launched the cryptocurrency. Big Tech companies with their plans for private currencies will add to the fragmentation. Pseudonymous Cryptocurrency account-identifiers provide no straightforward way to monitor transactions and could be used for Money Laundering, unregulated cross-border transfers, and other illicit purposes.

Regulated National Cryptocurrencies (CBDCs)

A regulated national cryptocurrency (Central Bank Digital Currency – CBDC) that exhibits capabilities of the unbridled decentralised ones, but without the associated perils, is being talked about as an alternative.

Reduction in the cost of managing cash, financial inclusion and interest rate change transmission are benefits (among others) of a new virtual currency. It is not evident what value a parallel currency can bring to the retail space in a stable economy. India’s digitalisation push, a large base of banked individuals, and seamless payment systems are already bringing about transformation and financial inclusion. Greater digitisation thrust and continuous improvements and innovations in Payment’s infrastructure and regulation can better deliver benefits.A Central Bank-issued Cryptocurrency that competes with the Rupee in the retail space would lead to parallel systems, overheads, and confusion about multiple tenders, without any benefits.

The Central Bank (and Regulator) having to get involved in the retail payments space (manage customers and accounts) and Deposit withdrawal from Commercial Banks and the associated rise in interest rates are some of the downsides of a new Digital Currency (Digital Cash) managed by a Central Bank.The Central Bank’s focus should be on transformation by leveraging Blockchain and other digital asset management techniques.

An alternate to Decentralised Cryptocurrencies, and a distinct National Cryptocurrency, is to overlay a portion of the money in circulation with cryptocurrency characteristics, creating a Smart-Rupee. It will isolate part of the Money Supply (into Smart Money) -- making it available for a new class of value-added banking services, providing much-needed fund tracking, transparency and accountability, and money supply management.

The Hybrid approach reduces risks and obviates the need for an alternate tender that would lead to a parallel economy and an increase in the money supply.The introduction of the Smart-Rupee into core banking areas can reduce counterparty risk and help deliver innovative customer features and offerings around credit risk management (lending), etc.

When applied to Government finances, these can help bring about Transparency and Accountability in Public Spending and Projects.

Auditability, Instant Reconciliation and Oversight mechanisms –capabilities inherent to the underlying Blockchain platform -- equip both Central and Commercial Banks with requisite controls to safeguard the integrity of this monetary system.The Smart-Rupee will function as a (fungible) Rupee in the digital payment eco-system. The Smart-Rupee is bestowed with a distinctive identity, which allows it to be programmed, tracked, controlled and deployed for Smart services.

The introduction of the Smart-Rupee can have far-reaching consequences and benefits for the economy and needs a well-thought-out strategy. It is akin to other structural reforms like Demonetisation, GST and UPI – and could well be the first such initiative globally.The key stakeholders in the Smart-Rupee eco-system are the Government, Central Bank, Commercial Banks, and Customers. Acceptance across the board will depend on Value, Control and Oversight, Operations, Security, and Customer Experience. A Two-tiered structure (RBI & Commercial Banks) is an optimal strategy.

(The writer is Director of a fintech start-up based in Bengaluru)