Throughout human history, money and payment systems have constantly reinvented themselves. From a simple barter system to trade based on precious metals, stamped coins issued by rulers and promissory notes issued by the central bank, all have been avatars of monetary and payment systems. From banknotes today, we have arrived at the era of virtual currencies or crypto-currencies.
They are essentially alphanumeric strings or are technically called hashes; Interestingly enough, they represent value in the real world. Despite the massive crash in the crypto world, Bitcoin, the classic and oldest crypto coin, is trading at around $20,000 each. Once money becomes a string of alphanumeric digits and independent of an intermediary such as a bank (to certify account balance prior to transaction) to be transmitted, it becomes electronically mobile and can be sent almost instantaneously in no time. any corner of the world.
Today there are thousands of cryptocurrencies. Cryptocurrencies being “external” money created by actors outside the jurisdiction of financial regulators, have been viewed with some caution by central banks around the world. Cryptos are money because they meet all three criteria of being money – a store of value, a medium of exchange, and a unit of account. However, they have a major problem for users: wild price swings. An innovation called stablecoin solved this problem by making the value more stable in an acceptable narrow band. It has accelerated the adoption of crypto because it removes uncertainty around prices to a large extent. Although this is about the external environment of money, it is illustrative to look at the rapid changes in the Indian financial sector in the recent past.
UPI – The Transforming Agent
The introduction of UPI (Unified Payments Interface) in 2016, after demonetization, was a watershed moment in the history of the Indian financial system. From a modest start of 2.6 million transactions worth Rs 893 crore in 2016, UPI recorded 6.78 billion transactions worth Rs 11.16 thousand crore in September 2022, in a months only. Today, UPI-based payments represent more than 40% of total real-time global payments (ACI report). The country has taken a giant step in modernizing its payment systems and, according to some estimates, has achieved a GDP (gross domestic product) efficiency gain of between 0.5% and 1%. The UPI platform is expected to process approximately 70 billion transactions worth over $1.5 trillion in FY22-23.
UPI has also contributed significantly to financial inclusion in India. Ownership of bank accounts has increased significantly, from 40% in 2011 to around 80% in 2021 (World Bank Global Findex Database 2021). So far, 470 million new Jan Dhan accounts have been opened. The icing on the cake is that there is no significant urban-rural divide in account ownership, indicating that many new accounts come from rural areas.
Behind UPI’s resounding success is the enabling infrastructure and some brilliant design choices. The near-universal biometric identity, Aadhar, and extensive mobile access form the backbone of UPI. The UPI, backed by the non-profit National Payments Corporation of India (NPCI) and the Reserve Bank of India (RBI), has become a public good. NPCI set the standards and authorized API (application programming interface) based access to all stakeholders, inviting a slew of innovation into the fintech space. Today, nearly 350+ banks are onboard the UPI platform. Giving users the freedom to remember complicated 16-digit bank account numbers and IFSC codes through easy-to-remember virtual UPI addresses like [email protected] and QR codes has accelerated its adoption. Perpetual struggle to find the right amount of change after every customer transaction sends smaller traders rushing to UPI.
RuPay – Strategic Technology
In 2013, NPCI introduced RuPay, an indigenous card payment system offering lower costs to banks and merchants. What started with a market share of around 0.6% is now around 60% and has gained or is in the process of gaining international acceptance in countries like Singapore, Bhutan, Nepal, Maldives , United Arab Emirates, Bahrain, France, United Kingdom. , Europe and South Korea. The RuPay payment network provides an alternative set of card payment rails to the Indian market and reduces the risk of the impact of sanctions or embargoes should they be imposed against India. It also offers a credible, low-cost solution for countries wanting alternatives to the duopoly of card payment networks.
CBDC, e-Rupi and Programmable Money
As stated earlier, central banks have always been concerned about the rapid proliferation of this “external” currency called crypto. Cross-border remittances were difficult to track and measure accurately, and the ultimate beneficiary of a transaction was harder to map. The preferred cyber ransom currency is crypto. Stablecoins are recognized as a direct competitor to central bank money (ECB paper on CBDC, December 2021). In this context, central banks have reassessed their digital strategies and focused on a solution called Central Bank Digital Currency (CBDC). CBDC is essentially a digital version of fiat currency (banknotes).
The European Central Bank’s Digital Euro Report 2020 lists five scenarios in which launching a CBDC becomes imperative. One of them is the emergence of a credible alternative to central bank money. The steady rise in stablecoins seems to have triggered the scenario supporting the case for a digital euro. Today, around 100 central banks around the world are planning to issue digital currency. These include China, the United States, the United Kingdom, Europe and India. China’s e-CNY project is already in the pilot phase. Last month, the United States released its Digital Assets Executive Order setting out the ground rules for building a digital dollar.
In India, in her latest budget speech, the Minister of Finance (Nirmala Sitharaman) pledged to launch a blockchain-based CBDC. In a recently released concept note on the CBDC, RBI gave a clear view of its thinking on the digital rupee. He advocated the launch of an interest-free wholesale digital rupee as well as a retail digital rupee. Additionally, it supported a combination of DLT (distributed ledger technology) and centralized architecture for its CBDC launch.
The Prime Minister’s launch of e-Rupi in 2021 for a cashless vaccination program gives a glimpse of the capacity of a digital rupee. It could be considered programmable money. The built in digital token (a unique alphanumeric string) can be the purpose for which this money can be spent, and it can even be programmed to expire. Many government social security and grant programs can benefit from this programmable feature. For example, a grant intended to pay for a child’s school fees or school uniform cannot be diverted for any other expenditure by the parents. Additionally, e-Rupi is compatible with feature phones (non-smartphones) and can be processed offline. Thus, it promises to enable a UPI-like experience for around 60% of mobile users for their payment needs.
Well-designed interoperable CBDCs can significantly reduce the transaction cost of cross-border payments. The BIS (Bank for International Settlement) is working on m-Bridge technology which, if adopted, could see money transfers across banking channels as efficiently as crypto transfers. The world of fintech is on the cusp of a major transformation, with CBDCs taking center stage.
Santosh K Misra is a former IAS officer. The opinions expressed in the article belong solely to the author.