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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