Digital Currencies, Blockchain and Central Bank issued Digital Currencies — What is your opinion ?

A thought provoking Article on Digital Currencies & Pro’s and Con’s of a Central Bank issued Digital Currencies (CBDCs) {Based on Distributed Ledger Technology (DLT) / Blockchain Technology and Cryptography} (made after going through some articles and reference material from the web and academia) -

Initially, to start with, let us see — Pros of CBDC -

1. New technology will lead to lower transaction costs, decrease the price of acquiring and sharing information which can destabilize conventional banks and their role in the banking system.

2. Direct access to central bank accounts would enable the general public to hold legal tender in electronic form.

3. Open access to central bank accounts ͚to all͛, would create a centralized ledger making payments settlements extremely fast as all accounts would be in the same system without the need of intermediaries.

4. If deposits were mostly held at the central bank, deposit insurance would also be obsolete and not needed thereby cutting some more hassles and costs.

5. Retail cross-border payments might also benefit if conducted through central banks directly, if central banks coordinated on mechanisms to handle those international payments.

6. Governance and stability.

7. Efficiency in payment systems.

8. Handling of risks in deposit accounts

9. Responsibility for compliance with KYC (know your customer) and AML (anti-money laundering) would fall on the central bank. These operations might be outsourced to private operators but the difference with the present system is that the deposit would be a liability of the central bank and mistakes would — at the very least — carry reputational risks for them.

10. Major scams (in all financial, economic related sectors with special mention to banking, trade and commerce !) like ………..(particularly in India) (Well you all know ! — I need not mention them here and spoil the sanctity of this Article !) may be strictly avoided, since Central Bank is having direct control over everything !

11. Counterfeiting / duplicating / hoarding / black money issue of National Fiat currency / coin may be avoided and there would be hopefully no need for demonetisation drives.

Now, coming to the most important aspect (Is it ? Can we not solve them ? Oh ! Come on ! Nothing in this world is impossible ! In my opinion, the issues mentioned below are just the most decrepit things I ever imagine to exist in this world !) — Cons of CBDC !?!

1. There would be sharp increase of cyberattacks as wealth would be centralized.

2. There may be implications of retail banking beyond payments.

3. The decentralized validation process is inefficient and slow, and anonymity is more a disadvantage than an advantage.

4. In addition, while replicating the anonymity of cash in electronic format might sound appealing, central banks would not want to offer cryptocurrencies as vehicles for illegal activities. On several grounds, the case against central bank cryptocurrencies seems to be strong.

5.Who will you call when your account is breached?

6. Would they pay an interest?

7. Banks would lose the income they make from facilitating payments and also from the related network of relationships they build with their customers. To the extent that such services, networks, or even customer information are complementary to other banking services such as lending and wealth management, the competition for funds from central banks may have even larger disruptive consequences.

8. We may face issue of unemployment or short term destabilisation of economy with the introduction of new technology (which is a very minor issue, and everything can be sorted if properly thought of sincerely !)

However, if seen, in a broader sense, overall, there is an increasing pressure for faster and more efficient payment systems. Lack of innovation on payment systems comes from the complex and outdated infrastructure that banks use. Can innovation be introduced without challenging the bank deposit model? I believe — Yes! Let us take for example — The open banking initiative in the UK or the related PSD2 directive of the EU are actively promoting innovation by requiring banks to provide access via APIs to Customers’ accounts. The recent successful launch of a United Payments Interface in India (BHIM UPI) to facilitate real-time payments is another example where regulation and coordination can make a large difference. But still this UPI model lacks most of the Cons of CBDCs discussed above. In all these examples, individuals can use their preferred smartphone app to conduct payments without having to embrace a world with separate money balances and possibly separate currencies.

So, strictly speaking, in the present scenario as far as Digital Currencies are concerned, you are trusting money to a complex system which you do not understand, people you know nothing about, and an experiment you have no legal recourse. However, a good starting point would be that after addressing the problems and issues of one sector, to compare, afterwards, the new results with the previous ones. Bitcoin for example has been hacked and x% of US Dollars is stolen annually. If Bank͛s’ capitals (INR), stolen either by hacking or fraud cases as discussed briefly above, is greater than that some x% US Dollars or INR, then bitcoin is safer and thus people must embrace it in order to make it even safer. Think about one thing — What if our primitive ancestors never invented fire for the fear that it will burn them ? Virtual currencies have great capabilities and very powerful ones that can easily disrupt the banking industry faster than many bankers think. Crypto community shall self regulate their entities and self police the wrongdoers with hackers helping the industry instead of deteriorating it͛s trust. China as we saw previously is moving on this direction with no-banking payment applications.

Changes do not occur overnight, it took years to develop the infrastructure and for enough consumers to trust the technological marvels like internet companies, computers, etc. Initially when computers were introduced to the world, very few had access to them. What about now ? Initially when CRT Televisions were introduced, very few had access to them. Can’t we see what is happening now ? You have LCDs, LEDs, Plasma, QLEDs, OLEDs, blah … blah… blah …. Most importantly fintech innovation came about because a few companies would not accept missing pieces of their environment as a given. They built new, more efficient systems rather than waiting for incumbents to do it for them . The banker of tomorrow will need to acquire skills and adapt to roles unheard of today. The same applies to lawyers that have business relationship with all the industries that new technology is going to disrupt. Short term skill acquisition, continuous learning will define FINTECH. Banks on the other hand need to fully embrace the path where emerging technology is taking them. They need to extend their customer centric approach to make it employee centric. Embrace the new generation of bankers and encourage innovation. Afterall, we cannot sit idle by not embracing the new technologies for the fear that they cause silly problems like unemployment, short term economic destability, etc., Right ? Shall we start ? New technologies are trying to take us to the Moon comprising of stability, transparency and immutability and still do we want to reside in the Netherworld full of corruption and other unsocial elements more sinisterly in nature ?”

Now comes the question — “What the hell ? Not everybody is technologically advanced !” Yes ! And also looking into the history, remember the fact that the birth places of frauds and corruption is often at some of the higher levels and rarely at lower levels (No offense meant). Do you agree to disagree with the fact that higher levels are not technologically advanced? Also when compared to the quantum of frauds at some higher levels, would an individual ‘X’ bribing an individual ‘Y’ with an amount of say 500 or 1000 INR matters ? Remember the fact that if elders show a respectful way then the youngsters will often follow the same ! So, embracing of such new technologies, need not always be started from the lower levels, they may happen at higher levels involving transactions. Changes do not occur overnight, as already said !

Electronic Money : Greater and long term economic stability, transparency, immutability and perfect situation for seamless audit tasks (it is also likely that short term instability of economy occurs, but is negligible when compared to the greater good). Afterall, in my opinion, the common notion is — “Where money flows, Regulators go!”

Regarding Regulations and Fintech sector, I hope I will get another good opportunity to discus them here !

P.S. (Note) : Suggestions, corrections and omissions are most cordially Welcome !

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