A fit case for digital currency

Uncontrolled COVID-19 pandemic continues to throw uniquechallenges to even strong establishments, indicating an inevitable change inthe world order. The geopolitical landscape as well as socio-economic order inthe global context stands derailed by this most complex catastrophe of themodern times. This situation has created a huge challenge to the leadershipsacross the globe as their established laws and practices of governance, be itpolitical or corporate, have been almost swept by the pandemic. Even as it’s ahealth emergency, it has simultaneously created a never-before-seen economicemergency even in strong economies in the world. In other words, thecoronavirus is acting as a termite on the global monetary system, threateningan economic depression which could be more dangerous than the Great Depressionof 1930s. There is a writing on the wall that the post pandemic situation wouldbe confronting economic losses which will be both massive and enduring innature.

As the pandemic has forced us to visualize a new worldorder, which global experts too have vetted as inevitable, the pressure on theleaderships mounts further when it comes to realign practices of governancewith the COVID-19 induced changes. Precisely, the world is at crossroads. Evenone critical change can turn the tide for or against us. It would be a test ofabilities to strike with the right kind of changes to get the economy on theright track.

   

Let’s take up the issue of monetary system. The Covid-19crisis among other things has pushed the central banks across the globe topursue digitalization of the global monetary system. In fact, digitalization ofthe monetary system is seen as one of the arsenals to fight the COVID-19pandemic and its implementation is inevitable. In digitalization of themonetary system, the primary move is to shift from physical currency to digitalcurrency. In the outbreak of coronavirus, it was found that currency notes andcoins can aid the spread of this deadly virus. Some countries have alreadyasked their citizens to stop using currency notes altogether. Media reportsrevealed that South Korea’s central bank was taking all notes out ofcirculation for two weeks, and even burning some, to reduce the spread of thevirus. Reports also stated that China burnt a good chunk of its currency as ameasure to put breaks on the outbreak of coronavirus.

Remarkably, a bulletin from the Bank for InternationalSettlements (BIS), the body owned by 62 central banks, has highlighted cashconcerns because of the COVID-19 virus. It states that perceived risks, validor not, brings the potential for digital payments to the fore. And the BISspecifically makes a case for Central Bank Digital Currencies (CBDC).

Let me quote some facts listed by the BIS in its bulletin.It says research has shown that viruses can persist on banknotes. That’s basedon past research relating to influenza and other viruses as well as more recentCOVID-19 research, which show non-porous surfaces are better at transferringthe illness. However, the bulletin points out that there are no provencases of transmission through cash, and scientists found the risks are thoughtto be low compared to other frequently touched objects. The main risk for COVID-19is thought to be airborne droplets. Plus, using cards at point of saleterminals also carries some risks, particularly PIN pads. In both cases,washing hands is important.

Now, what can be done by the government in the givencoronavirus induced global mayhem? The immediate answer to this question is toconvert the crisis into an opportunity as the stage is set for introducingofficial digital currency to substitute the physical currency in the long run.India has been pursuing its mission to launch a digital currency since long andthe crisis is an opportunity to realize the dream. Experts have also beenpitching for introducing electronic currency by bringing advanced technologiesinto play to safeguard the interests of the country and its citizens. So, withmany revolutionary technologies like payment mechanisms such as UPI, blockchainavailable around us, a lot can be achieved in the financial landscape. Byinvoking technology to design a digital currency platform can unlock numerousways for much better economic practices.

To be precise, this is the time to “never let a crisis go towaste,” and move to digital money which could be integrated within all UPIenabled payment systems. Of course, use of physical currency notes can’t bestopped abruptly, but establishing a platform for digital currency can bestarted right now and then rolled out in phases to fully substitute physicalcurrency. For a while, digital as well as physical currency can be allowed toco-exist.

In this regard, a queue can be taken from China, which, in asignificant move, amid COVID-19 crisis launched a trial of digital yuan,eRMB,  in four urban centres of thecountry for specific services.  The eRMB “will not be issued in largeamounts” for public use in the short term, and that the digital currency incirculation would “not lead to an inflation surge”.

In the backdrop of given scenario, the Reserve Bank of India (RBI) needs to seriously pursue its own virtual (crypto) currency. Notably, some time back, it was reported that India along with other BRICS countries were mulling to introduce their own common cryptocurrency to counter USD. Even there has been a buzz about India, China and Russia developing their own fiat cryptocurrencies. While Dubai, Venezuela, and few other countries have already made their plans official, India’s crypto plans and developments have rather been on a slow track. Now is the time for India to strike with its own cryptocurrency.

For common man’s understanding, cryptocurrency is basicallya digital cash, created from code. It’s just a software that everybody candownload for free. It’s through this software one can receive and sendcryptocurrencies. It’s monitored by a peer-to-peer internet protocol. Everypeer has a record of the complete history of all transactions and thus of thebalance of every account. It’s completely decentralized with no server orcentral authority.

Some examples of this virtual currency are Biticon, Etherealand Ripple. Bitcoin is the largest and oldest of cryptocurrencies, which is tradingat a huge premium across various global exchanges. Today, cryptocurrencies havebeen found as a fast and comfortable means of payment across the globe.

Broadly speaking, the virtual currency has two properties:transactional and monetary properties. As far as transactional properties areconcerned, the transactions are irreversible after it’s confirmed.

Although the cryptocurrency has gained broader acceptanceand growing user-base, the laws and regulations around bear some questionmarks. Notably, in December 2013, the regulator issued warning cautioning usersof virtual currencies against risks at the time when India already had fewcryptocurrency exchanges and services running. This impacted the operations andthe virtual currency trading was called violation of the Foreign ExchangeManagement Act (FEMA) rules. Later, the RBI banned use of banking channel incryptocurrency transactions, which very recently the Supreme Court lifted andasked the apex bank to allow trade in virtual currency and cryptocurrency

Here it’s worth mentioning that  in December 2014, the then RBI GovernorRaghuram Rajan infused new blood among investors when he said, “I have no doubtthat down the line, we will be moving towards a primarily cashlesssociety…and we will have some kinds of currencies like this (bitcoin) whichwill be at work.” He further added, “I think these virtual currencies will   certainly get much better, much safer and overtime will be the form of transaction, that’s for sure.”

Meanwhile, unlike decentralized cryptocurrencies, such asbitcoin, that allow users to transfer value with no central authority or thirdparty involved, the government-backed digital currency can be put under thecentralized mechanism of the RBI to keep track on transactions.

(The views are of the author & not that of the institution he works for)

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