India’s fight against corruption and the the case for digital paper currency
By de-monetizing 500₹ and 1000₹ notes Prime minister Modi made sure November 8th will go down as a watershed day in the fight nay struggle against corruption in the Indian economic context. An oft quoted step though brought up at various points in time and by various parties, NGOs and private bodies was never thought of as something which would happen in anyone’s lifetime. The measure has a huge potential to create havoc in the cash economy as well as incur all the short term disadvantages such a step would bring to the one taking the plunge, though in the long term has potential to reap rich rewards or political hara-kiri depending on how it plays out.
Looking beyond the political angle, if we take a digital and technology disruption perspective into play, this move pans out as a godsend for the nascent fin-tech culture in the country. A country which is primarily a cash driven economy suddenly is staring at a scenario where cash is no longer king. Common-sense will say, this is a few weeks irritant and the white economy will get over the bump as soon as there is enough liquidity in the market. Sane minds will believe and react accordingly, but not everything works that way. In the short term there will be a huge uptick in digital money alternatives and a few of them would ride out this wave to reach critical mass which will help them in the long stead. The Paytm’s and the Freecharge’s of the Indian start up world would have rejoiced and rightly so for this provides a unprecedented tailwind which no amount of marketing and ad awareness campaigns would have got them.
This post is not about any of the fin-tech disruption though, this post is about an opportunity in the new 500₹ and 2000₹ notes being introduced by the reserve bank. Physical notes are not going away anywhere, not so soon, neither is counterfeiting and black money transactions disappearing in its entirety. There is lot of noise around the new notes being embedded with Nano GPS, anti-counterfeiting measures some of which would never be known to the common folks and rightly so. We as technology guys who have seen block-chain in its various forms and digital currency see an opportunity to incorporate the technology with paper currency to add another layer of defense against counterfeiting as well as hoarding of cash.
Concept note for digitizing paper currency with block chain technology
A semi-public ledger (Published by RBI and maintained at all the bank servers) will generate block hashes which by its definition be unique and hard to replicate or duplicate. Each high value notes which are printed would be embedded with their own unique block hashes and maintained in the block chain maintained by the banks and signed by at least 3 or more different bank infrastructure. The digital hash would be another layer of digital legitimacy to the note apart from all the other existing anti-counterfeiting measures. This aims to solve two problems, making the effort required to counterfeit a currency higher as every counterfeit needs to have a block hash which forms part of the same chain as well has be part of the semi-public ledger and the infra of more than 3 banks being breached to authenticate the fake block hash, a tall order any which ways you look at it.
Just like UPI, API’s could be exposed by the financial authority in charge of the ledger to authenticate any hash for legitimacy. These API’s can be part of all the banks apps to scan the hash and in real time notify if the note is authentic. No need for holding the note to the sun of dedicated scanners in hands of the common folks.
As for hoarding and tracking, say person X withdraws an amount and they are paid out in high denomination currency by the ATM or bank teller. The bank infrastructure notes the identity (PAN or Aadhaar) against which the block hashes have been issued for. Person X now breaks this amount down into say for example 3 tranches and pay person Y, Z and Black. Y makes cash deposit into their account closing the loop for the transaction and bringing this tranche of blocks into the audit loop. Person Z pays this forward to person A who then pays B so on and forth to Person N who deposits it back into the banking system bringing the two end points Y and N into the audit loop for the money trail. IT systems are strong enough at this point to establish a money trail between two end points for any slippages along the way.
The last tranche paid to person Black was not over the board, this block would now disappear from the audit loop as person black will not deposit it into the bank and either hoard it or try to pass it on in the market. Hoarding would lead to the block of hashes being out of the audit loop for a period of time which could be tracked to send IT questionnaire to the last known point of ownership of the block(Person X) to check to whom payments were made to in a certain period of time, thus forcing the hands of either X or Black to own up and pay tax on the transaction.
Though simplistic in explanation, these trails could and would get very complicated in real life where potentially millions of such block are tracked in real time, but technology says this is not really a problem is it? The problem of scale has been solved by existing technologies, the problem of application of these solutions in better governance and processes remains to be solved.
Disclaimer: Making no presumptions about existing measures in the currencies being rolled out, it may so happen that much more robust measures are in place making musings like above seem like children’s puzzles
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