The active digitization of large domestic financial institutions is an obvious, definitely positive trend. Russia is one of the five world leaders in the speed of transition to cashless payments, and the number of transfers and non-contact payments are increasing year on year. Such executive development requires changes in legislation, and inevitably, many financial experts and representatives are turning to the issue of cryptocurrency and its place in the modern financial world.
In this matter, the policy of the Bank of Russia focuses primarily on the destruction of the discourse surrounding cryptocurrencies. The national central bank does not consider it appropriate to define cryptocurrency as property at the level of civil law but allows it to be regarded as property in relation to certain laws, including anti-corruption law.
Related: Russia leads international stablecoin initiative
Cryptocurrency has a reputation for being a conduit for criminal money laundering and negatively affecting the stability of financial systems. According to the central bank, there are reasons to strengthen the control over currency transactions and increase their transparency, and more importantly, there is an impetus to develop an alternative such as the digital ruble. It will be a digital currency, whose operation has already been successfully completed in several regions of China by the People’s Bank of China, and several other countries are at the testing stage.
Related: Russia is updating its laws for cryptocurrencies
What change will the digital ruble bring?
First, it will increase accessibility and reduce the cost of payment services. This is a concern for many banks as it could lead to an outflow of clients. The fear is that convenient, cheaper electronic wallets from the central bank may become more conducive to the applications they currently use.
Cryptocurrency, unlike the digital ruble, does not meet the interests of money regulators and the tax system and does not include a centrally obligated individual. However, today, Russia’s payment system is already quite advanced: Immediate transfers are available to consumers along with QR codes, contactless payments and convenient banking application interfaces. Thus, the attractiveness of the transition to the digital ruble for consumers is far from obvious. Banking institutions are not interested in making information about client 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.
Also, the digital ruble can be designated as a separate type of currency, which has the advantages of digital currency (electronic currency) and fiat currency, which have individually defined characteristics, by analogy with the series and number of banknotes. Supporters stress that in the long run this will lead to the complete elimination of the shadow economy and the impossibility of any money laundering, as any stage of a digital currency transaction can be easily tracked.
What mechanisms for the technical implementation of digital ruble are offered by a Russian central bank? It is considering three options: decentralized distributed registries, a central database and a hybrid option containing a combination of the first and second.
The use of distributed registries and hybrid variants can ensure a higher level of transaction security, announced as an advantage by fans of the digital ruble. The disadvantages of these options are relatively low performance compared to the second option, and the lack of generally accepted accounting and other reporting standards.
The central registry option wins 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 access to it is entirely under the control of 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 into a database with a centralized storage is easier than accessing keys for a blockchain-based system. Therefore, any central database is a priori more vulnerable to cybercriminals.
If the central bank chooses decentralized distributed registries and smart contracts at launch, the speed of transactions will be affected, states the central bank in its report, but security will improve.
Four digital currency models are being offered by the Russian Bank. The first one involves the implementation of e-wallets by the central bank to other financial institutions for interbank settlements without the participation of individuals and legal entities, although, as a less promising one, it is not designed 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 liquidity outflow. The third and fourth models give financial institutions and banks a number of intermediary functions, which will allow customers to open e-wallets under familiar conditions and on familiar platforms and applications.
Digital ruble in social payments
The state allocates subsidies to families and wants this money to be spent only on children. Today, it is not always possible to track how the subsidy money is being spent. If these amounts are paid in digital rubles and can only be spent in children’s stores buying children’s goods, it would solve the problem of inappropriate spending. Such payments can be color coded: “Blue” goes to subsidies, “red” goes for tax payments. Other charges can also be coded to prevent their abuse.
Another promising area for digital currency is international payments. Conducting transactions within a specific group of provinces can become more convenient and quicker if a digital currency mechanism is used.
Although digital currency was originally designed 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 is affecting their commission income.
So now the debate, including central bank consultations and market participants, is not so much about introducing digital currency in principle (no doubt this will happen) but about what new service banks will do can make it deliver to customers – for example, tracking transactions, some kind of “color code,” smart contract programming and so on.
The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Victor Dostov is the research director of the Distribution Ledger Technologies Center at Saint Petersburg State University and chair of the Russian Electronic Money and Pay Association.