Payment Systems & Future Of Money: As an alternative to fiat currency, CBDC emerges as a credible alternative
The world of fintech is about to undergo a significant upheaval, and central bank digital currencies (CBDCs) are taking center stage.
Money and payment methods have undergone ongoing changes throughout human history. Avatars of money and payment systems have ranged from a straightforward barter system through precious metals-based commerce, ruler-issued imprinted coins, central bank-issued promissory notes, and more. We have now transitioned from the era of cash to that of cryptocurrency.
The remarkable thing about them is that they convey value in the actual world even though they are essentially just alphanumeric strings or hashes. The traditional and oldest crypto coin, Bitcoin, is selling at over USD 20,000 per coin despite the severe fall in the cryptocurrency market. Money becomes electronically mobile and may be transmitted almost instantly to any location in the globe once it is converted to a string of alphanumeric digits and is no longer dependent on a middleman, such as a bank (to verify the account balance before transacting).
These days, there are a huge number of cryptocurrencies. Since they were developed by individuals outside the purview of financial regulators, cryptocurrencies are considered “external” money and are thus being closely monitored by central banks all over the world. Cryptocurrencies are considered money because they are a store of value, a means of trade, and an accounting unit.
The users do have one significant issue, though: the wildly fluctuating prices. This issue has been resolved by an invention called stablecoin, which makes the value more stable within a reasonable small band. It has sped up the adoption of cryptocurrencies since it greatly reduces price uncertainty. Even though this is the outside environment of money, it is instructive to look at the recent swift developments in the Indian financial system.
UPI – The Transformation Agent
The launch of UPI (Unified Payments Interface) in 2016, following de-monetization, was a turning point in the development of the Indian financial system. From a modest beginning of 2.6 million transactions costing 893 crores in 2016, the UPI has logged 6.78 billion transactions worth Rs 11,16,000 crore in September 2022, in only one month. Over 40% of all worldwide real-time payments are now made through UPI (ACI report).
The nation has made significant progress in modernizing its payment systems, and some estimates place the efficiency benefit in GDP (gross domestic product) at 0.5% to 1%. Over 1.5 trillion USD in transactions are anticipated to be processed using the UPI platform in FY22–23.
UPI has also made a substantial contribution to India’s financial inclusion. Ownership of a bank account has sharply increased from 40% in 2011 to around 80% in 2021. (World Bank Global Findex Database 2021). So far, a staggering 470 million new Jan Dhan accounts have been created. The cherry on top is that account ownership shows no discernible urban-rural difference, indicating that many new accounts are from rural regions.
The supporting infrastructure and a few wise design decisions are what have contributed to UPI’s explosive success. UPI’s core components include Aadhar, broad mobile access, and an almost ubiquitous biometric identity. UPI has been elevated to the status of a public benefit with the support of the RBI and the nonprofit National Payments Corporation of India (NPCI). The NPCI has established the guidelines and given all stakeholders access to the API-based (Application Programming Interface), which has opened the door for a plethora of fintech developments.
At this time, the UPI platform has roughly 350 banks using it. Its growth has accelerated thanks to the availability of simple-to-remember virtual UPI addresses, such as abc@oksbi and QR codes, which save users from having to memorize 16-digit bank account numbers and complex IFSC codes. The constant battle to obtain the correct change after each client transaction has pushed the smaller retailers inexorably towards UPI.
RuPay – The Strategic Technology
RuPay, an indigenous card payment system with cheaper costs for banks and retailers, was implemented by NPCI in 2013. Having gained or is gaining worldwide acceptability in nations like Singapore, Bhutan, Nepal, the Maldives, the UAE, Bahrain, France, the UK, Europe, and South Korea, what began with a market share of roughly 0.6% is now at over 60%.
In addition to offering an alternative set of card payment rails to the Indian market, the RuPay payment network mitigates the effects of any restrictions or embargoes that could be placed on India in the future. It also provides a dependable, affordable choice for countries searching for alternatives to the duopoly of the card payment network.
CBDC, e-Rupi, and Programmable Money
As was already said, central banks have long been concerned about the ‘external’ currency known as cryptocurrency’s explosive growth. Accurate tracking and measurement of cross-border remittances were challenging, and identifying the ultimate recipient of a transaction was challenging. Online ransom payments are most frequently made with cryptocurrency.
Stablecoins are seen as a direct rival to central bank currency. In light of this, the central banks have revised their digital strategy and chosen a solution known as Central Bank Digital Currency (CBDC). In essence, CBDC is a digital representation of fiat (banknote) money.
Five situations where a CBDC launch is required are listed in the European Central Bank’s Digital Euro report 2020. The creation of a trustworthy substitute for central bank money is one of them. The scenario that supports the case for a digital Euro appears to have been set off by stablecoins’ steady ascent. Approximately 100 central banks worldwide are planning to issue digital money at this time. China, the US, the UK, Europe, and India are notable examples of these. The e-CNY initiative in China is now in its prototype stage. US President Barack Obama issued an executive order on digital assets last month that created the foundation for creating a digital currency.
Nirmala Sitharaman, India’s finance minister, promised to introduce a blockchain-based CBDC in her most recent budget statement. The RBI recently produced a concept note on CBDC that outlined its position on the digital rupee in great detail. The introduction of both a wholesale and retail digital rupee without interest has been encouraged. Additionally, it supported a hybrid centralized and distributed ledger architecture for the introduction of its CBDC.
A demonstration of the potential of a digital rupee will be provided by the Prime Minister’s introduction of the e-Rupi in 2021 for a cashless vaccination program. One may compare this to programmable money. The use for which this money may be spent may be preprogrammed into the digital token, and it may even include an expiration date. This configurable feature might be useful for several government social security and assistance programs.
For instance, parents are not allowed to use a subsidy meant to cover a child’s tuition or uniform for any other purpose. Additionally, the e-Rupi may be used for offline transactions and is compatible with feature phones (non-smartphones). Thus, it claims to give around 60% of mobile users a UPI-like experience for their payment requirements. The transaction cost of cross-border payments can be greatly decreased by well-designed, interoperable CBDCs.
The Bank of International Settlement (BIS) has been developing an m-Bridge technology that, if used, could make banking channels for money transfers as efficient as those for crypto transactions. CBDCs are at the center of a significant revolution that is about to take place in the fintech industry.