The article deals with the recent NPCI decision to cap the number of transactions by third party application providers (TPAPs).

Context

• The National Payments Corp of India (NPCI), in its recent guidelines imposed a 30% volume-based cap on the share of transactions by TPAPs and payment service providers (PSPs), effective from January 2021.

 5 issues with the volume-based cap

1) It undermines cashless economy

• The growth and recognition of UPI would not have been possible had a cap been in place.
• Typically, customers limit themselves to one or two TPAPs of their choice.
• A transaction cap that forces users to use multiple apps may result in more transaction failures and dilute UPI’s popularity and impact.
• Lack of accessibility and user-friendliness would push users away from UPI towards other payment methods, or even cash.

2) It’s an anti-consumer decision

• Open markets and user choice have been crucial factors in the exponential increase seen in UPI adoption and its transactions.
• A volume-based cap would compel TPAPs to either limit the number of transactions on their platforms or stop enrolling new users, which in turn would restrict the customer’s use of UPI.
• TPAPs will likely be forced to redact customer incentives like cashbacks, coupons and the like.
• This could go against consumer interests by reducing choice.

3) It will also make the Indian market less attractive for investors:

• The cap would raise compliance and regulatory costs for players in the sector, which could deter new investors from entering.
• It would also adversely affect the growth potential of existing UPI players.

4) No regulatory impact assessment

• The idea of a volume-based cap does not appear to have undergone an assessment of its impact on the sector.
• As a general principle, before any such rule is imposed, an RIA (Regulatory Impact Assessment) needs to be undertaken.
• Systemic risks are not restricted to UPI and are common in all financial systems; yet, a similar cap has not been suggested for, say, retail bank transactions.

5) Impact on Atmanirbhar Bharat

•  In order for Indian businesses to grow and compete at the global level, we need to integrate business processes with the global economy.
• Indian start-ups, in particular, need tools and infrastructure that lets them gain an international edge.
• Atmanirbhar Bharat envisions a self-reliant India that thrives on innovation, technology and entrepreneurship.
• But this vision cannot be fulfilled if our policies restrain the growth of a cashless economy.

Conclusion

India’s UPI ecosystem is nascent, but has demonstrated significant growth and has had a positive impact on the economy by providing the backbone needed to move towards cashless commerce. Any policy decision by regulators at this point should aim at catalysing innovation in this space. Stifling it would serve India badly.

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Central banks all over the world have had mixed feelings towards cryptocurrencies. Some of them have resorted to banning them altogether. And yet, cryptocurrencies exist and have been flourishing. But China seems to be bent on taking the “road less travelled”. This article explains the various aspects underlying the China’s move. These somehow apply to all the central banks, including the RBI. Read more to know more about such aspects.

Digital currency by China’s central bank

• In December 2019, a pilot programme was launched in Beijing to intensively advance the trial work of fintech innovation regulation.
• This pilot has now been expanded to include several other cities.
• This expansion of the pilot marks the initiation of China’s central bank digital currency (CBDC).
• Christened Digital Currency Electronic Payment (DCEP), available via a mobile wallet app.
• It is pegged 1:1 with fiat currency, and designed to replace M0 which comprises currency issued by the PBoC less the amount held by banking institutions.
• This is the first such serious initiative in the whole world.

Why central banks are sceptical of cryptocurrencies?

• Historically, monetary authorities everywhere have been sceptical of cryptocurrencies.
• The reasons for scepticism includes following problems-
• 1) Wild fluctuations in the value of cryptocurrencies.
• 2) The implied challenge to the monopoly of central banks in issuing fiat currencies.
• 3) The looming possibility of software bugs.
• 4) The tainted shadow of the dark web.

But some central banks have been planning to issue fiat digital currency

• Authorities were far more intrigued by CBDCs.
• In fact, the Basel-based Bank for International Settlement (BIS) has been conducting surveys on this issue for some time.
• The recent survey of 2019 “Proceeding with Caution – a Survey on Central Bank Digital Currency” revealed that while in general, central banks have been proceeding cautiously towards introducing central banks digital currencies.
• Some have been planning to issue a fiat digital currency in the short to medium term.
• In particular, the survey revealed that nearly 25% of central banks have the required authority to issue a CBDC, while a third do not, and 40% remain unsure.

If you cannot beat them, join them

• So, what factors led China to release the cryptocurrency?
• Chinese investors were always attracted to cryptocurrencies.
• With the bearish turn in the Chinese stock market in 2015-16, bitcoins became increasingly popular as an alternative asset class in China.
• As in media reports, in the recent past, China has emerged as the capital of the crypto ecosystem, accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin mining operations.
• The PBoC tried hard to curtail this exuberance but achieved limited success.
• The recent move to introduce the CBDC in China is a logical outcome of the efforts to curb and tackle its runaway cryptomarket practices.
• Or, the philosophy of the PBoC could simply have been, if you cannot beat them, join them.

Advantages and concerns

• At a practical level, the benefits of CBDC are manifold.
• First, paper money comes with high handling charges and eats up 1% to 2% of GDP.
• Second, by acting as a powerful antidote for tax evasion, money laundering and terror financing, CBDCs can materially boost tax revenues while also improving financial compliance and national security.
• Third, as a tool of financial inclusion, particularly in emergencies, direct benefit transfers can be instantly delivered by state authorities deep into rural areas, directly into the mobile wallets of citizens who need them.
•  Fourth, CBDCs can provide central banks with an uncluttered view and powerful insights into purchasing patterns at the citizen scale.
• In the long run, it is believed that CBDCs will make cross-border payments fast and frictionless.

Concerns

• All these salutary benefits come packaged with a deep and abiding concern about the relentless rise of a surveillance state and the concomitant erosion in citizen privacy and anonymity.
• If face-recognition technology enables states to spy on the physical movement of citizens, will CBDCs be used to spy on every movement of their money?

But how Central bank’s digital currency is different from private cryptocurrencies such as Bitcoin?

• An earlier research paper by PBoC Deputy Governor favoured a two-tier CBDC model.
• In this model instead of directly interacting with the public, the central bank would involve financial intermediaries such as commercial banks.
• In tier 1, the central bank would interface with financial intermediaries.
• In tier 2, the financial intermediaries would interface with the general public.
• Advantage? Such a model is accretive in that it preserves the power of existing financial systems and extends their influence further.
• It is believed that the DCEP uses a DLT architecture (with central controls) which preserves the primacy of the monetary authority, unlike private cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) that are truly decentralised.

Silver bullet to slay three dragons

• What may China be signalling with the launch of DCEP?
• First, on the world economic stage, it may want DCEP to challenge the hegemony of the U.S. dollar as the default global reserve currency.
• Second, in its war with American BigTech, it may want to showcase DCEP as its weapon of choice to counter FB or Facebook’s Libra, which is planning to offer a common cryptocurrency to 2 billion-plus FB users across the world.
• Third, and still in the realm of speculation, it may wish to use the DCEP to clip the wings of AliPay and WeChatPay, gigantic fintech duopolies that control 90% of the China’s domestic digital payments, and whose ambitions may one day pose a threat to the aura and authority of the central bank.

Consider the question “Most of the central banks have been sceptical in their attitude toward the cryptocurrencies. Yet, they persisted. Next came the Supreme Court decision lifting ban on them. In light of this, examine the advantages and concerns that come with the cryptocurrencies.”

Conclusion

From gold to silver to paper to digital, the march of currencies goes on. China has rolled the dice on central bank digital currencies, challenging other nations to follow. Welcome to the future of money.

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Context

India has crossed the target of a billion monthly digital payments. Now, to a billion transactions a day.

The story of payment revolution and financial inclusion in India

• Progress on the financial inclusion: India was long a financially excluded nation –only 17 per cent of Indians had a bank account in 2011.
  • 50 more years estimate: The World Bank suggests it would have taken 50 more years for 80 per cent of Indians to get a bank account at the pre-2011 speed.
  • Yet, we reached that milestone in 2018.
  • How? A magical combination of
  • Political will (Jan Dhana Yojana and Aadhaar embedding).
  • A proactive central bank (creating a non-profit market participant entity and levelling the playing field between non-banks and banks).
  • And a technology stack with three layers (identity, payments, and data).
• The rise of UPI
  • The swift rise in use: The digital payment transactions on the Universal Payment Interface (UPI) platform rising from 0.1 million in October 2016 to 1.3 billion in January 2020.
  • Result of working together: This represents the magic of entrepreneurs, nonprofits and policymakers working together.
  • And gives us a new target — a billion transactions a day.
• India’s Payment revolution
  • What are the components of the payment revolution: India’s payment revolution comes from-
  • A clear vision: Shifting the system from low volume, high value, and high cost to high volume, low value, low cost.
  • A clear strategy: Regulated and unregulated private players innovating on top of public infrastructure.
  • And trade-offs balanced by design: Regulation vs innovation, privacy vs personalisation, and ease-of-use vs fraud prevention.
• What consumers wanted?
  • Consumers wanted a payment experience that was mobile-first, low-cost, 24/7, instant, convenient, interoperable, fintech friendly, inside banking, and safe.
• Answers lies in UPI.
  • What did UPI achieve?
  • Interoperability: UPI created interoperability between all sources and recipients of funds -consumers, businesses, fintechs, wallets, 140 member banks.
  • Instant settlement: UPI settles instantly inside the central bank in fiat money -state-issued money declared by the sovereign to be legal tender.
  • Blunted data monopolies: Big tech firms have strong autonomy but weak fiduciary responsibilities over customer data, it was taken care of by UPI.

5 Policy lessons from the success of UPI

• First- how the India stack: Interconnected yet independent platforms or open APIs — are a public good that-
  • Lowers costs, spur innovation and blunts the natural digital winner-takes-all.
  • Replication in other areas: Replicating this in education, healthcare, and government services are likely to be a harbinger of large scale multi-domain collaborative innovation.
• Second-collaboration: Collaboration can create ecosystems that overcome the birth defects of its constituents–
  • The execution deficit of government, the trust deficit of private companies, and the scale deficit of nonprofits.
• Third-policy intervention: Complementary policy interventions are important.
  • Demonetisation and GST are changing the stories that firms and individuals tell themselves around cash and informality.
• Fourth-human capital and diversity matter: This revolution needed career bureaucrats to partner with academics, tech entrepreneurs, venture capitalists, global giants and private firms.
• The final lesson-Western model is not needed always: India doesn’t need to be Western or Chinese to be modern. If our policymakers had copied Alipay or US banks, we wouldn’t have leapfrogged their birth defects.

Way forward

• Fix the deadline: The central government must deadline digitising all its payments.
• RBI implement 100+ action items: The RBI must implement the 100-plus action items arising from its own Vision 2021 document and the Nandan Nilekani Committee for Deepening Digital Payments.
• UPI for inward remittances: RBI must also make UPI and RuPay fit for use in our $70 billion inward remittances that currently come through exploitative financial institutions which don’t have clients but hostages.
• Replication of UPI in bank credit: The RBI must replicate the core design of UPI — fierce but sustainable private and public competition in bank credit-
  • Our 50 per cent credit-to -GDP ratio is one of the reasons India is poor.
  • China’s 300 per cent is the wrong number, but reaching the OECD average of 100 per cent needs the RBI to do many things-
  • Raising its human capital and technology game in regulation and supervision.
  • Catalysing an ecosystem for lending against the rapidly expanding digital exhaust of small firms and individuals.
  • Issuing more private bank licences, facilitating management changes in old private banks with market caps that signal questions about book value, and shepherding governance and human capital revolution at PSU banks.

Conclusion

Converting the collective independence our citizens got in 1947 to individual freedom surely involved universal financial inclusion. The gap between this aspiration and reality was not a lie but a disappointment because our capital got handicapped without labour and our labour got handicapped without capital. Change has begun -the RBI, the finance ministry, and many individuals deserve our gratitude and dues for a billion digital payments a month. We now ask you for a billion digital payments a day.

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