RBI to Take Over E-Money

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In a controlled economy like India, Internet is always looked upon as a  potential threat to the regulatory regime. The RBI has been closely monitoring the developments of the Internet and E-Commerce and has been expressing its desire from time to time to control the E-Commerce business through its own regulations.

In one of the latest attempts to exercise its control on E-Commerce, a working group constituted by RBI on E-Money has come up with suggestions on electronic systems that  can be used as  multi-purpose e-money.

The Working group headed by Mr Zarir J Cama which submitted its report on July 11, 2002 has expressed its opinion that the Electronic Payment Systems have the potential to become an independent medium of exchange and therefore needs to be regulated. The group appears to be concerned that the role of the monetary authority would be undermined with the growth of e-money and its ability to control liquidity in the financial markets would be affected. It also appears to be worried that it will lose track of statistics relating to money supply.

Accordingly the group has recommended that e-money for multipurpose use can be issued only when the payment has been made by the e-money holder in full through Central Bank Money. Issue of e-money against credit is recommended to be restricted to Banks. Only single purpose e-money is recommended for use by other entities. It also suggests that where e-money is issued in exchange of any other kind of services, a "Redemption Option" should be provided for conversion into Central bank Money.

The working group report raises an interesting debate about the need to regulate e-money and the role of "Non Banks" in managing systems of e-money issued in exchange of services. According to the working group's argument, if an establishment pays salary to its employees partly in the form of "Service Coupons" such as "Canteen Coupons", or "Petrol Coupons" etc, this would amount to issue of "Currency" in competition with the Central Bank and would affect its monetary control. In fact the Government of India's "Food For Work" programme itself will come under the working group's definition of money (as a limited use currency).

While the concerns of the working group about the partial marginalization of the Central Bank in the event of say a "Microsoft Currency" that can be used for buying Microsoft products  becomes available, is a theoretical reality, one need to look into the future and debate whether such a development is at all undesirable. Today's currency system where the Government of a country has an uncontrolled leverage on the Gold assets as for as the issue of paper currency is concerned is not the same currency system which Central Banks were theoretically meant to manage. The monetary control exercised by the Central Bank today is on an artificial money supply which includes deficit financing and credit supply.

By mandating that the e-money should be redeemable into paper money, the working group has put a stop to the development of a "Pure Digital Currency" which would not have added to the paper money supply and at the same time created a wealth in the digital world which could have acted as a catalyst of growth.

If A earns 1000 e-rupees by rendering an e-service and uses it to buy another e-service from B, the digital economy would grow independent of the paper economy.

This parallel economy is different from the parallel economy we normally talk of in respect of Black Money circulation where the money in either economy is indistinguishable. E-money and real money is however distinguishable and the controlling points are the Banks which are already under the control of the Central Monetary authority.

As long as e-economy remains outside the real world, its adverse impact on the real economy is only imaginary. If however, the system provides for paper currency to be  converted into digital currency and reconverted back into paper currency  then the damaging influence of a parallel economy would be felt by the common people.

The problem is not therefore in the e-money concept but in the interaction of e-money with real money. If therefore the gateway to conversion of e-money to real money and real money to e-money is regulated, then all the concerns of monetary control etc would be addressed adequately without disturbing the growth of e-economy.

What should be thought of is a system to keep the two systems insulated so that the digital economy growth need not be constrained by the real economy growth. If this is done, perhaps, Indian digital economy can try to grow faster than the world e-economy growth.

The inter-society wealth conversion mechanism would come to apply when a digital economy surplus needs to be transferred to real world wealth and it can be taxed at that time as real world income.

Similarly when the real world money is transferred to digital money to fund a deficit, the loss in the physical world can be recognized for tax purposes if need be.

This approach would also avoid the issues of determining where the e-money originates, whether e-money flowing across geographical boundaries need to  be controlled etc. By making the two currencies mutually convertible, we increase the opportunities of the system being abused for money laundering purpose. By making them mutually exclusive, we prevent any unauthorised conversion of e-wealth into Indian currency. If other countries also follow similar principle, then e-money would have no impact on the real money supply or on issues such as money laundering.

I would like economists to respond to this thought.

Naavi

August 5, 2002

Related Article in The Hindu

Working Group Report

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