When paper money goes digital


Programming note: There won’t be an edition of ETtech Morning Dispatch and Top 5 on March 29, on account of Holi. We will be back on March 30 (Tuesday).

Good morning,

A survey conducted this year by the Bank for International Settlements (BIS) found that 86% of countries were actively researching Central Bank Digital Currencies (CBDCs), 60% were experimenting with the technology, and 14% were deploying pilot projects.

What are Central Bank Digital Currencies?

Right now, the only form of money you use that’s backed by the Reserve Bank of India is physical cash. Every other form of money, that is to say, all the digital money you’ve ever used, is backed not by the central bank but by a commercial bank. (The money in your Amazon Pay balance or your Uber account isn’t technically money since you can’t transfer it back to your bank account or ask Amazon or Uber to exchange it for cash. But CBDCs could change that, too.)

crypto - getty

How money is created

Central banks create money in one of two ways.

  1. By printing it themselves, creating what is technically called central bank money but better known as cash.
  2. Indirectly, by making primary deposits in commercial banks. The banks in turn keep a fraction of this in reserve and in effect multiply the rest by putting it to work through credit, loans and advances. This is known as credit money or book money. Once recorded on physical ledgers, it is now almost universally digital. Importantly, credit money is backed not by the central bank but the commercial bank that issued it.


Hello, disruption

CBDCs are — or rather will be — a digital version of cash — that is, the physical notes and coins issued by central banks. They are meant to complement, and one may entirely replace, printed money.

They differ from other forms of digital money in that they are backed not by commercial banks but by central banks, and by extension, governments. Since CBDCs are the liability of the central bank, just as with physical cash, the government would have to maintain reserves and deposits to back them up, rather outsource this job to a commercial bank.

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Who’s doing what?

  • China, which has been exploring CBDCs since 2014, has begun trials of the e-yuan.
  • European officials say they want to launch a digital euro by 2025.
  • Many others central banks, including America’s Federal Reserve and the Reserve Bank of India, are at the research stage.

What’s got governments interested?

Cost: Thanks largely to an outdated banking system, the cost of managing and transferring digital cash is high. The most immediate impact of CBCDs, which you could one day hold in a wallet app on your phone, would be to drastically reduce these costs. Banks have seen the existential threat this poses, but aren’t the most nimble of institutions and will struggle to keep pace.

Speed: If digital money is just 0s and 1s on a computer, why does sending money overseas still take days? The traditional banking system isn’t just expensive, it’s also slow. CBDCs could bring huge improvements here, especially on cross-border payments.

Inclusion: A digital rupee could in theory give any Indian who owns a mobile phone, but lacks a bank account, easy and safe access to secure, government-backed money. It could also streamline the government’s various subsidy schemes.

Competition: As virtual assets on people’s mobile phones, CBDCs could be another payment option alongside credit and debit cards, and more modern platforms such as UPI. As with UPI, companies will compete to create apps that support it. Phone makers such as Apple and Samsung will have a strong incentive to create their own versions, which will doubtless come preinstalled on their future phones.

CBDCs would also speed up the execution of monetary policy.

Escape from sanctions: The Bank of Russia has said that one reason it might launch a CBDC is to help it dodge economic sanctions imposed by the US and Europe by reducing the Russian economy’s dependence on the US dollar. But it didn’t explain how a digital rouble would help achieve this.

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CBDCs and crypto

In some ways, CBDCs are the antithesis of cryptocurrencies, which were created to give people an alternative to centralised money.

However, they are likely to cherry-pick at least some of the technologies that underpin cryptocurrencies, such as cryptography and blockchain, to mimic some of their features. Which of these, if any, a central bank chooses to include in its CBDC will depend entirely on its reason for issuing a digital form of cash in the first place.
– Zaheer Merchant


Let’s move on to other big developments of the week

DEALS IN THE WORKS

  • Edtech major Byju’s is in talks with a clutch of investors including B Capital to raise around $500-600 million financing that could propel its valuation to as much as $14-15 billion, three people in the know of the development told ET. The capital infusion is primarily to fund Byju’s acquisition of Aakash Educational Services that is being pegged at $700-800 million in size.
  • Tax management platform Cleartax is in talks with Tiger Global to lead a $100 million funding round, three people with direct knowledge of the development told ET. The round could value the 10-year-old company at $750-$850 million. Cleartax chief executive Archit Gupta had previously stated plans to foray into newer areas such as stockbroking and wealth management services, in a bid to tap into India’s fast-growing retail investment market that has seen a huge influx of first-time traders amid the Covid-19 pandemic.
Deals Digest

KEEPING UP WITH THE FINTECH WORLD

  • The National Payments Corporation of India has unveiled its plan to cap the market share of UPI payment apps at 30% to enforce parity in the country’s fast-growing digital payments industry. The new rules are effective from the quarter beginning January 2021 although existing players with dominant market shares like PhonePe and Google Pay have received a two-year grace period for compliance.
  • SoftBank-backed insurance platform Policybazaar will partner with Paytm, Ola Financial, private sector lender IndusInd Bank and a handful of other companies to seek a license from RBI to set up a New Umbrella Entity (NUE) and build a national payments infrastructure company. An entity called Foster Payment Network, which will be co-promoted by three Paytm group entities and Mumbai-based Electronic Payment and Services, will front the NUE bid, sources told ET.
  • A retail entity, backed by Tata Sons, is working on a universal payments ID that could potentially replace thumbprint-backed transactions in the country. It is also working on a mobile phone-based universal point of sale (PoS) system that will be interoperable across all payment operators.
  • Stripe is overhauling its tech infrastructure in India and migrating servers hosting data of its Indian customers to within the country as mandated by local laws. This is expected to temporarily affect some of its services in the country.
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OTHER BIG STORIES BY OUR REPORTERS

Shailendra Singh

Sequoia India has racked up $195 million for its second seed fund, in addition to the $1.35 billion corpus it raised for India and Southeast Asia in July last year.

Zomato graphic

As Zomato prepares to go public in the next few months at a valuation of anywhere between $6 billion and $8 billion, ET collaborated with data platform Tracxn to take a closer look at how its valuation has risen and its cap table has evolved over the years.The ‘Metapurse’ crypto art fund aims to be a ‘tastemaker’ for the world as the conventional art community and buyers’ interests shift to Non-Fungible TokensWhatsApp has argued that billions of messages are sent from its platform every minute making it impossible to store or keep track of them.Psychologists say at least 20-30% of their clients are expressing concerns over meeting people offline as many have grown to prefer connecting online.

That’s about it from us this week. Have a great weekend!



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