Thinking Rationally

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  • RBI’s Concept Note on CBDC: A Review

    RBI has issued a concept note on CBDC on October 7, 2022. The stated objective for publication of this note is “to create awareness about CBDCs in general and the planned features of the digital Rupee”.  Incidentally in February 2020 RBI bulletin had published an article on Distributed Ledger Technique. This article had discussed DLT initiatives of 7 central banks. Interestingly, the concept note does not even refer to this article.

    In 2020, another article documented in detail (Opare and Kim 2020), a large number of ongoing CBDC initiatives of many central banks and classified these experiments into 3 groups based on their year of initiation. The authors have listed 10 Central banks in the Early Adopter group, each of which began their CBDC experimentation between 2015-2016.  It was, therefore, expected that RBI would evaluate the lessons learnt from these projects and come out with a more detailed feasible plan for its envisaged CBDC journey.

    It may not be out of place to note here that in April 2022, Indonesia’s central bank and the Bank for International Settlements (BIS) Innovation Hub announced launching of a global hackathon on 3 potential areas of CBDC’s uses. These areas are: use of CBDCs as a medium of exchange; use of CBDCs in a central bank’s financial inclusion initiatives; and use of CBDCs in cross-border payment system.

    Coming to the main content of RBI note, I would like to dwell on certain aspects of CBDC implementation that would be relevant in the context of India, a country of 1.38 billion people and which have been either not dealt with or dealt with perfunctorily in the concept note.

    1.  Financial Inclusion as one of the objective of CBDC (section 3.3.5 page 20 of the Note): CBDC is neither necessary nor sufficient for financial inclusion. Predominance of cash as medium of transaction is one indicator of a financial exclusion. The share of ”money in circulation “in M1 is 59% in India (end March 2022) while for USA it was only around 11% (end august 2022). For China, this figure was around 13% at the end of 2017. So financial inclusion is more of a function of formalization/ corporatization of economy and not of the form of money in circulation.

    2. [F]irst and fundamental question that needs to be answered is the choice of technology platform (section 5.1 page 31).:  Here lies the major confusion that RBI internal committee is plagued with. Once CBDC is designed as a platform based medium of payment like a bank account, it loses the main characteristics of paper money-that is instant settlement of a monetary transaction. One does not need an internet connection or a mobile connection for verification with a third party in case of a paper money mediated transaction. You should be able to make a cash payment and, therefore, payment with CBDC at the top of Everest or in a submarine at the bottom of Indian ocean.

    3. DLT could be considered for the indirect or hybrid CBDC architecture (5.2.2.2 page 32): The word “could” is somewhat equivocal.  In an “Indirect Model”, “consumers would hold their CBDC in an account/ wallet with a bank, or service provider.   …. The central bank would track only the wholesale CBDC balances of the intermediaries. ”(Section 4.3.2 page 24). It follows that the responsibility of maintaining DLT would lie with the intermediaries. It is not clear whether DLT would be blockchain based or not. If blockchain is not to be part of any solution, then the architecture of any DLT needs more clarification which is missing from the concept note. It is not clear who will bear the cost of maintaining DLT, if it is to be based on blockchain. Will it be a permissioned or permission-less?  If an intermediary issues a CBDC to its customers, can that customer use that CBDC in another place which is under the jurisdiction of another intermediary?  The concept note is silent on all these issues

    4. Further, systemic checks through third party validation should ensure that in case of a token system, only such tokens issued by the Central bank are circulating in the ecosystem. Additionally, a competent party should be able to verify identity information before a participant is allowed to join the CBDC network. (section 5.4, page 33). This requirement of RBI’s CBDC can be considered as the last nail on the coffin of RBI CBDC. RBI annual report of 2022 puts the total number of banknotes in circulation at 1305326 lac or 130.5 billion pieces. If each note participates at least one transaction in a year, at least 1 billion transactions need to be validated in one-year period. I left to the imagination of my readers about the feasibility and cost of such an exercise. Even verification of half a billion transactions will be a humongous task.  Furthermore, verification of identity information of a participant in CBDC network can be considered as a gross violation of privacy of a citizen.  The very purpose of issuance of bank notes will stand completely negated by this requirement.

    5. In offline mode, the risk of “double-spending” will exist because it will be technically possible to use a CBDC unit more than once without updating the common ledger of CBDC (5.6, page 34). I may humbly submit that I have proposed a detailed protocol by which the goal of preventing double –spending can be achieved (Nag 2021). My protocol tries to mimic all properties of paper note. The anonymity of transacting parties is largely achieved, although absolute anonymity cannot be achieved in a digital world.

    6. Indirect Model: The concept note has argued that this model is the most suitable for India. Under this model, “RBI will create and issue tokens to authorised entities called Token Service Providers (TSPs) who in turn will distribute these to end-users who take part in retail transactions.” It is like a customer of a bank withdrawing cash from ATM/bank counter and then spending it outside. In this case CBDC will be withdrawn.  But suppose the bank customer wants to pay CBDC to her maid who does not have a bank account, will it be possible?  If that bank customer withdraws the money from her account at Mumbai and wants to spend it in Kolkata, how the ledgers will get updated? If the CBDC paying wallet has been issued by a Bank A and the receiving wallet has been issued by bank B, how the shake hand will take place in the absence of internet connection?

    7.  China has started experimenting with CBDC since 2016 and has now started issuing e-CNY, which has now 260 million individual users. 

    References

    Fintech Department (October 2022).  Concept note on Central Bank Digital Currency

    https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONCEPTNOTEACB531172E0B4DFC9A6E506C2C24FFB6.PDF

    Ashok K Nag (December 2021). A Proposed Architecture for a Central Bank Digital Currency for India. ORF Occasional Paper No. 340, Observer Research Foundation.

    https://www.orfonline.org/research/a-proposed-architecture-for-a-central-bank-digital-currency-for-india/

    Bhowmick Sayantika and S. Majumdar (February 2020).  Distributed:  Ledger Technology, Blockchain and Central Banks   RBI Bulletin

    https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/0BUL11022020FL847E8EFB34744BAEBB2E45E91759ACCD.PDF

    Opare Edwin Ayisi and Kwangjo Kim (June 2020) A Compendium of Practices for Central Bank Digital Currencies for Multinational Financial Infrastructures in IEEE Access

    https://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=9115606

  • Indo-Pacific Economic Framework- A surrogate NATO for South and East Asian Countries?

    To understand the driver of the Indo-Pacific Economic Framework(IPEF) that has been launched on 24 May by 13 countries of South-East Asia including 4 members of the QUAD group and most of the ASEAN countries, we need to understand the interplay of regional and global aspirations of and challenges faced by these countries. 

    The first quarter of the present century has seen a quantum leap in humanity’s progress in science and technology creating the possibility of bringing an end to the childhood of humanity. A possibility but not a certainty. On the contrary, a more than even chance is emerging about a nuclear armageddon bringing an end to human civilization as we know it now. The 9/11 terror attack, the financial crisis of 2007-08, America’s war on terror and its exit from Afghanistan, the disproportionate impact of the COVID-19 pandemic on developed countries and now the Ukraine war -all are pointers to an irreconcilable conflict of interests among nations states of today which can be resolved only in a theater of war and destruction. Globally, there are two conflicting intertwined players- a declining but still globally dominant power, both economically and technologically, and a rising power with the ability to challenge the dominant one on both these fronts.

    The genesis of IPEF can be traced back to a 2018 document – declassified in January 2021- on Indo-Pacific Strategic Framework prepared by the United States National Security Council(USNSC). The foremost security challenge faced by the USA, as identified by the USNSS is: “How to maintain US strategic primacy in the Indo-Pacific region and promote a liberal economic order while preventing China from establishing new, illiberal spheres of influence, and cultivating areas of cooperation to promote regional peace and prosperity?”.

    The document emphasizes the threat posed by China’s rise as a technology superpower. “China seeks to dominate cutting-edge technologies, including Artificial Intelligence and Bio-genetics, and harness them in the service of authoritarianism. Chinese dominance in these technologies would pose profound challenges to free societies.”

    This 2018 strategy document also underpins India’s pivotal role in containing as well as counterbalancing China’s aggressive posture in the Indo-Pacific region. The document is quite candid about USA’s objective in regard to India- 

    “Accelerate India’s rise and capacity to serve as a net provider of security and Major Defense Partner; solidify an enduring strategic partnership with India, underpinned by a strong Indian military able to effectively collaborate with the United States”.

    The Indo-Pacific Strategy document issued in February 2022 by the US government espouses the same line of thought articulated by the 2018 document. The word “economic” is added to provide a veneer of creating a trading block like it was envisaged in the Trans-Pacific Partnership Agreement(TPP).  TPP did not take off as US Senate failed to ratify it.  Being a trade agreement, ratification by congress was a necessity. By making IPEF a framework document, a kind of declaration of intent, it should be possible to avoid the requirement of any legislative approval by all signatories. The word Economic is also slightly problematic since there are already two agreements for facilitating trade among countries of this region. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a free trade agreement (FTA) among 11 countries including Canada, Chile, Mexico, and Peru. The CPTPP was concluded on 23 January 2018 in Tokyo, Japan, and signed on 8 March 2018 in Santiago, Chile. Regional Comprehensive Economic Partnership Agreement (RCEP) is another free trade agreement between ASEAN countries and Australia, China, Japan, Korea, and New Zealand. India was a member of the drafting committee of RCEP but eventually did not join it because it would put India in a disadvantageous situation vis-à-vis China in a free trade regime. It is interesting to note that 3 ASEAN countries having close relationships with China, namely Cambodia, Laos and Myanmar kept them away from IPEF.

    Four areas of cooperation have been identified in the joint statement issued by the 11 signatory countries to IPEF. In each of them, it is difficult to see a convergence of interest of all signatory countries. For example, let us consider the Clean Energy, Decarbonization, and Infrastructure component of IPEF. Although India is a signatory to the Paris agreement that requires all countries to achieve net-zero carbon emission by 2050, the Indian prime minister promised to cut its emissions to net-zero by 2070 only.  China has committed to reaching net-zero status by 2060 while US and EU have committed to reaching the target by 2050.  India’s overriding national interest of poverty eradication by maintaining its growth momentum over a longer time will not allow it to toe its de-carbonization policies to that of developed countries who are already enjoying a lifestyle that has led to a much higher per capita carbon emission than is the case with India.

    As regards the Trade component of the framework, the declarative statements are as general as possible. Out of 13 participating countries in the IPEF framework, only USA and India are not part of another regional free trade agreement, Regional Comprehensive Economic Partnership or RCEP. China is a member of the RCEP trade block. India was a member of the RCEP drafting committee since the committee began its work in 2011 and just before the signing date of the agreement, in November 2019, it opted out. As a result, India would be out of two existing trade blocks that cover almost all important counties of the region- RCEP and CPPTP. So it is difficult to envisage what new terms and conditions can IPEF will bring in to assuage India’s concerns.

    As regards the Supply Chain component of IPEF, the statement says:” ensure access to key raw and processed materials, semiconductors, critical minerals, and clean energy technology”. Among the manufactured products only “semiconductors” is mentioned. The most important omission is Artificial Intelligence related products which represent the cutting-edge technologies of today.

    To conclude, on the high table of the 13 signatory countries of IPEF, the USA is bringing nothing substantial to offer. It is more of a taker than a giver. IPEF may turn out to be more of a hubris of a declining power.

  • Bear Hug

    A daughter is crying on her cell

    Oh my dearest mom

    Believe me, believe me

    The bombs are falling all around.

    The mother from Muscovy laughs aloud

    Are you awake, my sweetheart

    A hallucination, a nightmare no doubt.

    My bear is a polar one, eager to hug you all

    Proselytization is not Jesus’s call.

    My dear child

    Nothing to fear

    The winner will not take it all.

    The daughter cries out

    Mom, my dearest mom

    I love you

    I love you most.

    When no more call reaches to you

    Believe then, believe then

    That your Bear has taken me out.

    Ferocity, deception, and sheer arrogance

    Will prevail

    The winner will take it all.

    @apology to Abba for the line “winner takes it all”

  • Central Bank Digital Currency

    I am providing a link below to the latest version of my paper. The Reserve Bank of India has declared that it will start a pilot project on the issuance of CBDC. The former Governor Subbarao has strongly cautioned RBI against any interest payment on account-based CBDC. Please see my detailed discussion on various issues related to this subject.

    The key takeaways from my paper:

    1. CBDC should not be a mutated version of Bitcoin type digital coin.
    2. CBDC must possess three properies of paper currency fully and comprehesnively: No third party verification is required to transfer digital currency from a holder to a recipent.
    3. No account balance concept is introduced and therefore no double spending is possible.
    4. A holder is a legal owner unless proved otherwise.
    5. All digital currency are of a certain denomination and every transfer is legitimate as long as wallets are genuine. A proper application of public key cryptography and hash function allows a digital currency to mimic it’s paper based counterpart.
    6. The only difference with paper curreency is that transactions based on digital currency are not competely anonymous. But investigation of audit trail of a particular digital note would be very complex and costly. So it would not be easy.
    7. Double spending is prevented because notes are automatically modified in the wallet of the sender which will not be accepted by another receiver’s wallet. No internet is required for a transaction to take place and notes cannot be sent through internet.
    8. No requirement of a blockchain database.
    9. It is neither an account-based nor a token based payment system.
    10. Notes can travel back to issuer- the central bank- and get destroyed by the central bank.

    https://docs.google.com/document/d/1b9L8OGBUy7rVjvMVdFmnvP_9q1uNAG1i/edit?usp=sharing&ouid=109936802430456407164&rtpof=true&sd=true

  • COVID-19- A cross country analysis

    Introduction:

    The death toll of COVID-19 has reached 2.9 million by April 2021, a little less than 0.04% of the world population. In Wikipedia’s list of the largest known epidemics and pandemics caused by an infectious disease, COVID19 is ranked 8th in terms of its death tolls1. The deadliest known pandemic in history, the Black Death of 1346-1353 in comparison killed between 70-200 million people. Thus, humanity has been able to contain, if not eradicate, nature’s fury by constant progress in scientific knowledge and technology. And, to paraphrase Shakespeare, “therein lies the rub”2. The incidence of death due to COVID19 has been the largest in the most advanced country of the world- that is the USA.  Till January 2021, the USA accounted for around 20% of total recorded death worldwide due to COVID-19.  The top 5 countries, namely the USA, Brazil, India, Mexico, and UK accounted for a little less than 49% of total deaths. The share of these 5 countries in the world population was around 27% and excluding India the other 4 countries had only 9.5% of the world’s population3.  This huge disparity among various countries in terms of the mortality impact of COVID -19 calls for a cross-country analysis of the same.

    The objective of the present paper is to identify the distinctive characteristics of the countries recoding 1st wave of COVID-19 deaths of varying intensities. Since country is our unit of analysis, data on various proximate causes of death of a COVID-19 infected person may not be available at that level. However, available micro-level- studies of patients of a single hospital or a local administrative unit -like a county- can be relied upon to identify the possible factors like the presence of certain specific co-morbidities that could determine the fatality rate of the COVID-19 patients.

    The paper is organized into 3 main sections. Section I reviews the literature on the characteristics of COVID-19 patients and its impact on their subsequent survival. The parameters that have been used in creating a scoring system to determine the survival probability of COVID-19 patients are also reviewed. It is an accepted fact that higher mortality is expected for COVID-19 patients with chronic lung diseases like asthma. In this respect, the relevance of the so-called ‘hygiene hypothesis” is briefly discussed.  Section II discusses the data and methodology used. Section III presents the results. A concluding section follows.

    The paper can be downloaded from the link below:

    https://drive.google.com/file/d/1vptzjUt_yNVM43zMpAprZ7g0ifI7WoT3/view?usp=sharing