The active digitization of large domestic financial institutions is a noticeable, definitely positive trend. Russia is one of the top five providers in the world for the transition to cashless payments, and the number of contactless transfers and payments is increasing every year. Such active development requires changes in legislation, and inevitably many specialists and representatives of the financial sector turn to the topic of cryptocurrency and its place in the modern financial world.
On this matter, the Bank of Russia’s policy is mainly focused on destigmatizing the cryptocurrency discourse. The national central bank does not consider it appropriate to define cryptocurrency as property at the civil law level, but allows it to be viewed as property in relation to certain laws, including the Anti-Corruption Act.
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Cryptocurrency has a reputation for being a means of criminal money laundering and of negatively affecting the stability of financial systems. According to the central bank, there are reasons to strengthen control over monetary transactions and increase their transparency, and above all there is the impetus to develop an alternative such as the digital ruble. It will be a digital currency that has already been successfully implemented in several regions of China by the People’s Bank of China, and several other countries are in the testing phase.
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What changes will the digital ruble bring?
First, it improves accessibility and reduces the cost of payment services. This is a problem for many banks as it can lead to an outflow of customers. The fear is that convenient, cheaper central bank electronic wallets may become cheaper for the applications they are currently using.
In contrast to the digital ruble, cryptocurrency does not correspond to the interests of the monetary supervisory authorities and the tax system and does not involve a centralized obligated person. However, the Russian payment system is already quite well developed: instant transfers are available to users along with QR codes, contactless payments and practical interfaces for banking applications. Hence, the attractiveness of the transition to the digital ruble for consumers is far from obvious. Banking institutions are not interested in making information about customer accounts and their transactions publicly available. The implementation of the digital ruble will result in the sole owner of the database being the central bank.
The digital ruble can also be called a separate type of money, which, by analogy with the series and number of the banknote, has both the advantages of digital (electronic currency) and the fiat money supply, which has individually defined features. Proponents stress that in the long run this will lead to the complete eradication of the black economy and the impossibility of money laundering, as every phase of a digital currency transaction can be easily traced.
What mechanisms for the technical implementation of the digital ruble does the Russian central bank offer? Three options are considered: decentralized distributed registers, a centralized database, and a hybrid option that includes a combination of the first and the second.
The use of distributed registers and a hybrid variant can ensure a higher level of transaction security, which is proclaimed as an advantage by the supporters of the digital ruble. The disadvantages of these options are the relatively poor performance compared to the second option and the lack of a generally accepted implementation of accounting and other reporting standards.
The centralized registration option is gaining in its ability to handle heavy loads, but losing it due to its vulnerability. This also means that all user data is stored in one place and access to it is completely controlled by the central bank. Such a storage system is currently used by most commercial banking institutions and does not give the central bank any advantage over them. Hacking into a database with central storage is easier than accessing keys for a blockchain-based system. Therefore, any centralized database is inherently more vulnerable to cyber criminals.
If the central bank opts for decentralized distributed registers and smart contracts during the startup phase, the speed of transactions will be affected, the central bank states in its report, but security will improve.
The Bank of Russia proposes four digital currency models. The first concerns the implementation of e-wallets by the central bank to other financial institutions for interbank settlement without the involvement of individuals and legal entities, although this is the least promising and is not planned for further development. The second model puts the opening and maintenance of e-wallets under the full control of the central bank, which alarms the banking sector. With this model, there is a risk of an outflow of liquidity. The third and fourth models offer financial institutions and banks a number of intermediate functions that enable customers to open e-wallets under familiar conditions and on familiar platforms and applications.
Digital ruble on social payments
The state gives grants to families and wants these funds to be spent exclusively on children. Nowadays it is not always possible to keep track of how the subsidy money is being spent. If these amounts are paid in digital rubles and can only be spent in children’s stores that buy children’s goods, it would solve the problem of inappropriate spending. Such payments can be color-coded: “Blue” money goes to subsidies, “Red” to tax payments. Other payments can also be color-coded to prevent misuse.
Another promising area for digital currencies is international payments. Conducting transactions within a certain group of states can become more convenient and much faster when the digital money mechanism is used.
Although the digital currency was originally designed as an alternative to cash payments, it seems more likely that it will supplant traditional cashless payments. And for commercial banks, this is already a cause for concern as it affects their commission income.
Therefore, the discussion, including the central bank and market participant consultations, is no longer so much about the introduction of the digital currency in principle (there is almost no doubt that this will happen), but about which new service banks are in will be able to provide customers with – for example, the tracking of transfers, some kind of “color coding”, the programming of smart contracts and so on.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Victor Dostov is Research Director of the Distributed Ledger Technologies Center at Saint Petersburg State University and Chairman of the Russian Electronic Money and Remittance Association.