Author: Manan Jain
The world we live in has changed tremendously under the impetus of new and disruptive digital technologies. Digitalization is reshaping the economy, spurring out newer business models and defining better ways of doing business. Banking, Trade, and Finance have seen drastic technology-led changes over the past years. Solutions like Core Banking Systems, ATMs, Digital Banking solutions, API Banking, etc. have not only made the operations of the financial institutions more efficient, but have also brought about cost savings, adding to the customer convenience, and creating a connected ecosystem of stakeholders in the payments supply chain. These advancements have been driving digital payments’ transformation, i.e. the migration of cash payments and card payments to payments made over digital channels, which include tokenized cards, stored value accounts, i.e. digital wallets and the cryptocurrencies.
The case of Crypto Currencies
Of late, cryptocurrencies have emerged as a new asset class and a new mode of value, enabling better and unique modes of payments. Crypto Currencies can be broadly defined as digital units of account, the generation, distribution and maintenance of which is performed on blockchains. Crypto Currencies have garnered a lot of interest lately which has resulted in more than 1600 cryptocurrencies in the market today. They are widely being used for international remittances, as the mode of payment for e-commerce, retail purchases, etc. Not only this, but there have been bitcoin ATMs also, wherein people can withdraw cash against their bitcoins. Crypto Currencies have gained prominence because of the various advantages it provides.
The advantages of Crypto Currencies
Crypto Currencies offer a lot of competitive advantages over the forms of payments. It provides for an immediate settlement between the payer and the payee, as opposed to the card payments, cheque payments or digital payments via payment gateways and processors where a central agency does the settlement. It helps in the elimination of chargeback frauds as the transactions are irreversible. Additionally, it also lessens the cost of transaction as associated overheads for the transaction settlement, and transaction processing is no longer required since the transaction can be undertaken directly between the payer and the payee. Furthermore, the usage of digital currencies and cryptocurrencies saves on the cost of printing currency notes.
The limitations of Crypto Currencies
However, the current day crypto-currencies are non-institutionalized and are marred by volatility. The same can be gauged from the fact that cryptocurrencies like Bitcoin, Litecoin, Ripple, Ethereum, etc. have seen their cumulative market capitalization grow to a peak of $831 billion in January 2018, before shrinking to $186 in September 2018. The value of 1 Bitcoin made a high of 19,783 USD in December 2017 and is currently trading at around 3,740 USD in December 2018. Ripple is currently trading at a value of 0.37 USD, off from the highs of 3 USD in January 2018. This leads to a question mark on the usability of existing cryptocurrencies as a mode of payment, which is offered by private institutions which are not regulated and is not backed by Governments or Central Banks. Imagine the plight of an economy, if the currency is prone to such volatility.
The role of Central Bank Digital Currencies
The problem of volatility in the value of cryptocurrency also arises because these cryptocurrencies are not institutionalized, i.e. not backed by Banks or governments and the value is being determined by demand and supply.
It is here that the role of Central Bank Digital Currency gains prominence, addressing the different limitations of the cryptocurrency. The Digital Currency discussed here is a digital token and a legal tender, in the form of cryptocurrency which is issued by the Central Bank. It would be the liability of the state, and not of a private firm. There could be different models for the issuance of Digital Currencies, for instance, issuance of digital currency by Central Banks to the Commercial Banks, which in turn can issue the same to the end customers. However, the paramount factor is the backing of the state which provides trust to the end customers, besides ensuring adequate and proper monetary supply. The CBDC provides a more stable form of digital currency as opposed to the cryptocurrencies issued by private firms which witnesses huge fluctuations in its value.
Support for CBDC
Central Bank Digital Currency has found support from multiple organizations and governments. For instance, the government of Venezuela has already launched a national cryptocurrency called the Petro, or Petromoneda. The People’s Bank of China (PBoC) has been researching the concept of CBDC for some time now and has established a research institute named Digital Currency Research Lab for the same. Sweden’s Central Bank (Riksbank) has published an action plan for the second stage of the “e-Krona” project. The Iranian government has already developed an experimental model of a domestic digital currency. The Reserve Bank of India has already created an inter-departmental group tasked with analyzing the usefulness of issuing a rupee-backed digital currency. Christine Lagarde, MD and Chairwoman IMF, in her keynote address at the Singapore Fintech Festival 2018, talked at length on how CBDC can successfully promote financial inclusion and help economies become truly digital and cashless.
Not only this, but retail CBDCs are also being explored in Eastern Caribbean, Norway, Sweden, Uruguay, Bahamas, Canada, Ecuador, Israel, the Philippines and in various other countries.
Need for New Age platforms and the way forward for Banks
The modalities of the implementation for CBDCs, the role of the different institutions are being worked out and it will be sometime before the right model emerges, but one thing that has clearly emerged is the fact that digital currency does provide the solution for the future digital economy. It has been seen that Banks often struggle with the multitude of newer technology offerings and emerging digital ecosystems. Financial Institutions have been slow to react to the ever-changing payments landscape. They are handicapped not only due to the legacy systems which are not flexible but also due to the normal investment cycle, which can be out of sync with the need for fast decision-making and innovation. But these are the type of changes that need to be followed for proper execution.
The Arttha solution
It is with this vision of enabling Banks and Financial Institutions to provide newer products and services that PureSoftware launched cryptocurrency support for its flagship unified fin-tech platform – Arttha, at the IDC’s Asian Financial Services Congress, held in Singapore in March 2018.
Arttha is a unified fin-tech platform, enabling Banks and financial institutions to provide digital payments experience to their customers in an omnichannel way and to promote financial inclusion. It enables Financial Institutions to offer Digital Lifestyle Banking, Digital only Banks, Digital Wallets, Branchless/Agent Banking offerings for their end customers. It is an API based platform, having inbuilt integration adaptors for seamless integration with external systems. Thus, helping create an ecosystem and enabling multiple products and services like retail/wholesale banking offerings, payment services, card services, microfinance services, etc.
Arttha’s cryptocurrency module allows institutions to launch their own digital currency or cryptocurrency based on the blockchain. It allows the creation of the digital currency, debit/credit of digital currency from the accounts and conversion of digital currency to fiat currency as well, thereby enabling multiple uses on these basic services. In addition to issuance and management of digital currency on its own blockchain, the platform also acts as a middleware and orchestration layer, allowing institutions to integrate with other blockchain platforms for performing transactions in digital currencies, and providing these products and service offerings to their end customers. Being an open API platform, it also provides APIs for these digital currency operations and transactions, facilitating these services to be used by other third-party systems as well.
As the IMF has put in its staff discussion note titled ‘Casting Light on Central Bank Digital Currency’, CBDC could be the next milestone in the evolution of money. The needs for a truly digital economy necessitate the call for adoption of digital currency. The digital currency can exist in tandem with physical currency, and gradually reduce the dependence on the physical currency. The appropriate regulations, design, and policies are yet to be formulated, but digital currency holds a promising future and Banks need to be ready to embrace the future trends.