The active digitization of large domestic financial institutions is a noticeable, certainly positive trend. Russia is one of the five worlds leaders in the speed of the transition to cashless payments, and the number of contactless credit transfers and payments is increasing every year. Such active development requires changes in legislation and it is inevitable that many specialists and representatives of the financial world will turn to the issue of cryptocurrency and its place in the modern financial world.
In this matter, the Bank of Russia’s policy is primarily aimed at destigmatizing the discourse surrounding cryptocurrencies. The national central bank does not consider it appropriate to define cryptocurrency as property at the civil law level, but allows it to be regarded as property in relation to certain laws, including the anti-corruption law.
Cryptocurrency is known as a means of money laundering and negatively impacts the stability of financial systems. According to the central bank, there are reasons to strengthen control over money transactions and increase their transparency, and more importantly, there is the impetus to develop an alternative, such as the digital ruble. It will be a digital currency, the implementation of which has already been successfully carried out in different regions of China by the People’s Bank of China, and several other countries are in the testing phase.
What change will the digital ruble bring?
First, it will increase accessibility and reduce the costs of payment services. This is a concern for many banks as it could lead to an outflow of customers. The fear is that convenient, cheaper central bank electronic wallets may become more beneficial for the applications they currently use.
Cryptocurrency, unlike the digital ruble, does not meet the interests of money regulators and the tax system, and no centralized obligate person is involved. Today, however, the Russian payment system is already quite developed: users have instant credit transfers, QR codes, contactless payments and convenient interfaces for banking applications., So the attractiveness of the transition to the digital ruble for consumers is far from clear. Banking institutions are not interested in disclosing information about customer accounts and their transactions. The implementation of the digital ruble will result in the sole owner of the database being the central bank.
Also the digital rubles can be designated as a separate kind of money, which has both the advantages of digital (electronic currency) and fiat money, which has individually defined characteristics, by analogy with the series and number of the banknote. Proponents stress that in the long run this will lead to the complete eradication of the shadow economy and the impossibility of money laundering, as every stage of a digital currency transaction can be easily traced.
What mechanisms for technical implementation of the digital ruble are offered by the Russian central bank? It considers three options: decentralized distributed registers, a centralized database, and a hybrid option with a combination of the first and the second.
The use of distributed registers and a hybrid variant can provide a higher level of transaction security, which is touted as an advantage by the adherents of the digital ruble. The disadvantages of these options are their relatively low performance compared to the second option, and the lack of a generally accepted implementation of accounting and other reporting standards.
The centralized registry option gains in its ability to handle high loads, but loses due to its vulnerability. This also means that all user data is stored in one place and that access to it is fully controlled by the central bank. Such a storage system is currently used by most commercial banking institutions and does not give the central bank an advantage over them. Hacking a database with centralized storage is easier than accessing keys for a blockchain-based system. Thus, any centralized database is a priori more vulnerable to cyber criminals.
If the central bank opts for decentralized distributed registries and smart contracts during the launch phase, the speed of transactions will be affected, the central bank notes in its report, but security will improve.
Four digital currency models are proposed by the Bank of Russia. The first involves the implementation of e-wallets by the central bank to other financial institutions for interbank settlement without the participation of individuals and legal entities, although, being the least promising, no further development is planned. The second model places the opening and maintenance of e-wallets under the full control of the central bank, which is alerting the banking sector. With this model there is a risk of liquidity outflow. The third and fourth models give financial institutions and banks a number of intermediary functions that allow customers to open e-wallets under familiar circumstances and on trusted platforms and applications.
Digital ruble in social security benefits
The state grants subsidies 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 spent. If these amounts are paid in digital rubles and can only be spent in children’s stores to buy children’s items, it would solve the problem of inappropriate spending. Such payments can be color-coded: “Blue” money goes to subsidies, “red” is for 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 if the digital money mechanism is used.
While digital currency was originally conceived as an alternative to cash payments, it seems more likely that it will replace traditional non-cash payments. And it is already becoming a concern for commercial banks as it affects their commission income.
That is why the discussion, including the consultations of the central bank and market parties, is now not so much about the introduction of digital currencies in principle (there is almost no doubt that this will happen) but about what new services banks will be able to do. offer to customers – for example, transfer tracking, some sort of “color coding”, smart contract programming, and so on.
The views, thoughts and opinions expressed here are solely of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Victor Dostov is the Research Director of the Distributed Ledger Technologies Center at Saint Petersburg State University and President of the Russian Electronic Money and Remittance Association.