- Ali Kamran Al Zahid
Blockchain’ is a computer application based on Distributed Ledger Technology (DLT) and got the attention for being behind the cryptocurrency ‘Bitcoin’. DLT is a recent innovation and possess characteristics to be able to emerge as a better alternative to the existing centralized record keeping technique. Distributed Ledger is a combination of components including peer-to-peer networking, distributed data storage and cryptography that, among other things, can potentially change the way through which the storage, record keeping and transfer of assets are done today. In DLT, or Blockchain in particular, the system is designed to work in open source and in a distributed mode and enable nodes (i.e. computer systems) in a network to securely store records collectively, propose new changes (i.e. transaction), validate changes, synchronized and store records among the nodes. Since inception, the blockchain technology had attracted technologist and professionals to explore and implement it in the areas such as financial record keeping, identity management, repository of assets such as securities, shares and real estates, delivery of benefits, collection of taxes etc.
In case of ‘Bitcoin’ or ‘Ethereum’ digital currency is issued without a legitimate authority, here in the article, at a high level, we would like to see what if a legitimate authority use this technology and issue the digital currency. We will try to depict a picture about probable use of blockchain technology in managing a centralized digital currency and an e-wallet platform and rationalize how this could improve the financial management of an economy with particular emphasis on Government transactions.
The Banking and payments landscape in Bangladesh consists of 57 Schedule Banks, 18 of those are providing Mobile Financial Services – MFS. There are about 90 million regular bank accounts and another 50 Million MFS (m-wallet) customers in the country. Altogether there are 10 Million debit cards and about 1 Million credit cards. The electronic inter-bank retail payment systems consist of Bangladesh Electronic Funds Transfer Network (BEFTN) and National Payment Switch Bangladesh (NPSB) while the BD-RTGS (Bangladesh Real Time Gross Settlement) System caters for high value interbank payment settlement. The interoperability for card based transactions has been achieved by establishing NPSB in 2012, nowadays all the banks are connected to NPSB for their ‘not on-us’ ATM and POS transactions. However, internet banking through NPSB is yet to kick-off. Thus, as of today, real-time funds transfer among the regular bank accounts is not possible. Moreover, there is no interoperability among MFS accounts to transfer funds among cross-operator and to or from the regular bank accounts. So, Banks and MFSs are staying as islands having no interoperability. Therefore, there is a need for real-time retail payments infrastructure accommodating Banks and MFSs.
Bangladesh predominantly is a cash based economy. A recent study initiated by A2i programme of the Prime Minister’s Office suggested that only about 6% of total transactions in the economy are done in electronic form. Only 8.4% of all utility bills are paid electronically and only 2.6% of all B2P payments are made over electronic channels. Individuals make hardly any payments to government electronically. Lack of platform interoperability, currently inhibits, severely limits the scope of different payments that could be made digitally.
It also revealed that top 14 Govt. Social Safety Net Programs are prone to significant leakage, including ghost beneficiaries, and the misused amount is about taka 7.73 billion yearly. G2P payment disbursement, in digital means, could save an estimated US $146 million annually, the report added. Government is the single largest payment systems user in the country. In broad category Govt. payments includes salaries, vendor payments and Social safety Net payments and receipts includes VAT, Tax, customs duty, utility bills etc. Inefficiencies both in case of govt. receipts and payments prevail as overwhelming majority of these are being done in paper-based form (i.e. cash or cheque). Some payment digitization steps have been taken by some authorities, however these efforts are not done in coordinated fashion. Therefore, a universal payment digitization effort could eliminate inefficiencies, reduce costs in govt. payment processing.
Distributed Ledger Technology (like Blockchain) with permissioned users’ only, backed by cloud computing could solve the puzzle. These technologies possess the potential to offer new payments infrastructure that ensures speed, ubiquity, efficiency, safety and security. Blockchain based e-wallet and therefore the introduction of a digital currency could significantly improve the payments and settlement activities in an economy.
Currently, payment systems are regulated mostly by banks that maintain account information and keep transaction records (on behalf of its clients). In a Blockchain environment the financial records are housed in decentralized ledgers (computer nodes) that are jointly administered by all members of the network. Computer coding and algorithms enable a transaction to be aggregated in ‘blocks’ and are added to a ‘chain’ of existing blocks using cryptographic signature. There is no possibility to post illegitimate transaction in a blockchain environment, if anyone wants to manipulate a block, s/he would be required to manipulate previous blocks, those are the basis for the current one and the manipulation needed to be done to all or maximum number of nodes simultaneously.
Blockchain technology could be designed to address specific business needs in a customized technological environment. For example, in our case, a wallet account may be created in the system for individuals against each valid NID, which may require one-time registration via biometric validation. Government benefits would then be transferred against beneficiary NIDs to this platform while the access to these accounts made to be possible through card, mobile phone or even without anything (i.e. biometric). Beneficiaries would be able to withdraw funds from ‘Agent Points’ like bank branches, post offices or MFS centers (the model may be compared with ‘Western Union’ payment model). The system, therefore, needed to be integrated with several other systems (i.e. NID database, banking and mobile financial services infrastructure) and should provide access to relevant govt. agencies like Ministry of Finance or CGA (Controller General of Accounts).
DLT based payments infrastructure may also act like a central repository for smart financial contracts. Smart contracts enable information to be embedded in the ledger, allowing for self-execution. Examples of such contract include the execution of coupon and principal payments of govt. securities and monthly social safety net payments. These smart contracts would improve efficiency by eliminating the need for human intervention in executing transactions and thus reduce the probability of human error.
This proposed Digital Currency platform could be used for all govt. payments such as social safety net payments, pension, vendor payments and collections such as utility bill, vat, tax etc, and could equally be used by the private sector. The Blockchain wallet could simplify payment processes, improve information flows, reduce operational costs, expand access to financial services and could improve financial inclusion. Moreover, if the digital currency could be implemented in wider scale (both govt. and corporate level) and quickly, it may then bring huge impact on the economy and possess potential of an additional GDP growth up to 2%.
Additionally, it could play a significant role in sourcing the public finances. Currently, govt. borrowings are looked after by the central bank while govt. receipts (including utility bills) are managed by multiple financial institutions. Thus, a liquidity mismatch exists; govt. needs to borrow funds at times when there is surplus in their receipt accounts. The proposed centralized e-wallet or digital money platform could significantly reduce govt. borrowings by centralizing the fund management and also by utilizing the float funds in the system. Therefore, a business case could be developed accommodating participants (i.e. banks, MFS Agents, Post Offices etc.) in this platform with a fair share against their services. However, establishment of such a platform requires strategic direction from the top, as well as aggressive adoption and process change is required. Other aspects such as legal, governance arrangement and operation must be dealt by the central bank for ensuring quick, flexible and cost-effective means of clearing and settlement.
The proposed central bank digital currency or digital base money scheme may be compared with current banknote system which is a claim on the central bank. There are arguments among professionals and academicians regarding central bank’s issuance of digital currency. Some believe this as an opportunity for the central bank to expand its services to a much wider audience – general public. This proposition has two major implications. On one hand, it would make the deposit safer and therefore preferable however, the depositors may be deprived of the incentive (i.e. interest). On the other hand, it would affect commercial banks’ deposit base adversely and thereby their ability to make loans and advances.
Undoubtedly, distributed ledger is the technology for the future which demonstrated that digital records can be held securely without any central authority. Prudent adoption of DLT in introducing digital currency could mean a more open, more transparent, and more democratic national financial system. However, there is no example yet for Blockchain or DLT in case of a central bank issued digital currency. Impact assessment of a free-floating digital currency on the economic stability requires further examination. On the technical side, caution should be taken while designing, implementing the new platform and integrating the same with legacy systems considering all associated risk elements.
The author is the Joint Director of Bangladesh Bank.