Smart rupee: transformation at heart

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The smart rupee is a non-disruptive way to bring virtual currencies into the Indian economy and make transformative changes in the banking system. The rupee-centric approach avoids the need for a new national cryptocurrency or the adoption of decentralized ones. India has seen a lot of innovation and advancement in retail payments, especially in customer convenience and financial inclusion.

NPCI’s UPI, transparent payments, mobile banking and wallets, QR codes, P2P loans, neo-banks and e-RUPI vouchers recently launched are some of the initiatives. Fintech startups have leveraged technology to improve the customer experience and reach underserved segments.

The new umbrella entity (NUE) planned for the development of the retail payments infrastructure should open up the infra space to private actors, promote innovation and develop it further.

The Indian government and the RBI have played a central role, alongside private players, in making India’s retail payment systems one of the most advanced in the world. With the boost given to the retail payments space, the RBI, with its Digital Initiatives project in Rupees, now focus on the wholesale and basic banking segment?

Safeguard my assets

Recent developments in the Indian banking sector highlight the need for tighter controls and more transparency. Early warning systems that instantly report incongruities will protect lender assets which can quickly deteriorate into liabilities and non-performing assets (NPAs). Credit risks and the broader economic impact make it imperative that transformative change be envisioned at the heart of the banking system. .

The advent of blockchain and other technologies has brought to light new concepts and techniques for managing digital assets.

Cryptocurrencies offer benefits like instant domestic / international settlements, immutability, security, and high availability. Cryptocurrency supporters urge central banks to allow Bitcoin and other cryptocurrencies as legal tender.

Central banks, in general, are in no rush to make such claims, as they assess the value and impact of the new tender. Decentralized cryptocurrencies, by definition, do not fall under the jurisdiction of a central bank or its monetary policies. Central banks like to control the economy but have no levers to monitor the use, money supply, prices and liquidity of decentralized entities.

The volatility of cryptocurrency prices is solely due to public demand, sentiment, speculation, and the machinations of wealthy investors. The money supply is either inelastic 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 do not provide an easy way to monitor transactions and could be used for money laundering, unregulated cross-border transfers, and other illicit purposes.

National Regulated Cryptocurrencies (CBDC)

A regulated national cryptocurrency (Central Bank Digital Currency – CBDC) that features the capabilities of unbridled decentralized systems, but without the associated dangers, is being considered as an alternative.

Reducing the cost of cash management, financial inclusion and the transmission of interest rate changes are benefits (among others) of a new virtual currency. The value that a parallel currency can bring to retail in a stable economy is not clear. India’s digitalization push, a large base of individuals in banking, and transparent payment systems are already driving transformation and financial inclusion. A greater push for digitization and continuous improvements and innovations in payment infrastructure and regulation can deliver better benefits. A central bank issued cryptocurrency that competes with the rupee in the retail space would lead to parallel systems, overhead, and confusion about multiple bidding, with no benefits whatsoever.

The central bank (and the regulator) to get involved in the retail payments space (manage customers and accounts) and the withdrawal of deposits from commercial banks and the associated rise in interest rates are a few disadvantages of a new digital currency (Digital Cash) managed by a central bank. The central bank should focus on transformation by leveraging blockchain and other digital asset management techniques.

An alternative to decentralized cryptocurrencies and a separate national cryptocurrency is to overlay some of the money in circulation with cryptocurrency characteristics, creating a smart rupee. It will isolate a portion of the money supply (in Smart Money) – making it available for a new class of value-added banking, providing much needed fund tracking, transparency and accountability, as well as money supply management. .

The hybrid approach reduces risk and avoids the need for another bidding process that would lead to a shadow economy and an increase in the money supply. offers around credit risk management (loan), etc.

When applied to public finances, they can contribute to transparency and accountability in public spending and projects.

The mechanisms of auditability, instant reconciliation and oversight – capabilities inherent in the underlying Blockchain platform – equip central and commercial banks with the controls necessary to protect the integrity of this monetary system. The smart rupee will work as a (fungible) rupee in the digital world. payment ecosystem. The Smart-Rupee has a distinctive identity, which allows it to be programmed, monitored, controlled and deployed for Smart services.

The introduction of the smart rupee can have huge consequences and benefits for the economy and requires a well thought out strategy. It is akin to other structural reforms such as demonetization, GST and UPI – and may well be the first such initiative globally. The main stakeholders in the smart rupee ecosystem are government, central bank, commercial banks and customers. Acceptance at all levels will depend on value, control and oversight, operations, security and customer experience. A two-tier structure (RBI and commercial banks) is an optimal strategy.

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

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