CHANGING DIGITAL LANDSCAPE: THE CASE OF CENTRAL BANK ISSUED DIGITAL CURRENCY

1. CHANGING DIGITAL LANDSCAPE: THE CASE OF CENTRAL BANK ISSUED DIGITAL CURRENCY Introduction Our world is undergoing a rapid transformation 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 it easy for the financial institutions to operate but have also brought about cost savings, adding to the customer convenience. These solutions created a connected ecosystem of stakeholders in the payments supply chain. The advancements resulting from it 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.

2. The Case Of CryptoCurrencies  Of late, cryptocurrencies have emerged as a new asset class and a new mode of value, enabling a better and unique mode of payment. 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 are bitcoin ATMs as well, wherein people can withdraw cash against their bitcoins. Crypto Currencies have gained prominence because of the various advantages that it provides.  Crypto Currencies offer a lot of competitive advantages over other forms of payment. 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 also 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 CryptoCurrencies 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 that

3. are not regulated and not backed by Governments or Central Banks. Imagine the severe 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 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.

4. How New Age Platforms Help Facilitate Banks The ways of implementation for Central Bank Development Currencies and the role of the different institutions in the emergence of cryptocurrencies are in progress. It will take some time for the right model to emerge, but it is now quite evident that digital currency is one of the solutions of the future digital economy. It has been seen that banks often struggle with a multitude of new 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 With the vision to enable Banks and Financial Institutions in providing new products and services, PureSoftware launched cryptocurrency support for its flagship unified fin-tech platform – Arttha, at the IDC’s Asian Financial Services Congress, held in Singapore on March 2018. Arttha is a unified fin-tech platform, enabling banks and financial institutions to provide omni-channel digital payments experience to their customers 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. Other than 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

5. 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. Conclusion As the IMF has recently 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 need for a truly digital economy makes the call for the adoption of digital currency necessary. The digital currency can easily exist together with the physical currency, and gradually reduce 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.