How central banks will look at cash

Dubai - Payments are always in sync with technology because economies depend entirely on them

Serendipity is at work. The entrepreneur featured in today's article is an appropriate nod to International Women's Day. A person who plans to bring disruption into the traditionally male-dominated payments technology industry.


Background
Payments are at the root of all commercial activity. As the traditional English ditty says, "Money will make the mare to go". And at the root of all payments is settlements. According to the World Bank's December 2016 GPSS report, the total volume of real time gross settlement (RTGS) transactions is over $2,500 trillion.
Payments have always followed a simple process - Who is making the payment and can the person/entity be trusted? Can the payee make good on the promise? And once the promise is made, what is the process to obtain the funds? And finally, at the root of it all is the actual execution, i.e., obtaining the funds or settlement. Industry speak describes this process in four steps - submission, validation, conditionality checking and settlement. Payments are always in sync with technology because economies depend entirely on them.
Right now, it looks like we are in a period flux in payments technology. It's tempting to try to pin the changes on specific events - like the rise of the M-Pesa model in East Africa or the evolution of distributed ledger systems (DLTs) to support digital currencies or the role of blockchains in executing smart contracts or availability of powerful computers and cloud-based computing or the prevalence of smartphones or the inexorable rise of the Internet of Things and artificial intelligence. But it's all of this and more.


Distributed ledger technology for payment settlement
A recent news article from this paper provides a hint about just how fast this change is happening: "The UAE is working with Saudi Arabia's central bank to issue a digital currency that would be accepted in cross-border transactions between the two countries," Central Bank of the UAE Governor Mubarak Rashed Al Mansouri said. A recent report by the Bank of International Settlements briefly describes another couple of examples of regulators entering this domain.
"Project Jasper at the Bank of Canada [Chapman et al (2017)] and Project Ubin at the Monetary Authority of Singapore [MAS (2017)] simulate real-time gross settlement systems on a DLT platform."
A third example from the same report states, "The Riksbank [Sweden's Central Bank] has embarked on a project to determine the viability of an eKrona for retail payments."
Commenting on the argument for the issuance of Central Bank Digital Currencies (CBDCs), a recent JPMorgan research reports states: "One such rationale is to keep up with the times: payment systems are increasingly cashless, and it would seem natural that central bank-provided payment services move in that direction."
That is a very powerful consideration. As the volume of electronic transactions goes up, the archaic cash-based systems start creaking. The Swedes have learnt this quite quickly. Most Swedes use Swish, a domestic payments wallet linked to bank accounts, to make payments. It has become so prevalent that many merchants do not accept cash anymore. And the old methodology of printing cash notes as part of fiscal policy doesn't apply as effectively. One way to deal with a stockpile of paper currency is to dematerialise it, just as it happened with stock certificates and cheques. However, there is still the challenge of legacy processes and systems that could slow down the settlement.


The company
Arushi Sood Joshi, CEO and founder of AtCash, has built a central bank digital currency solution on top on the industry standard Corda open-protocol format. AtCash has added a superior authentication layer for identity management as well as a purpose built digital settlement currency.
"We [at AtCash] are driven by creating efficiency and effectiveness in financial services. Specifically, we view the area of interbank settlement ripe for disruption through finding a cutting-edge replacement for traditional real time gross settlement payments. We firmly believe that the future of digital currencies for Interbank Settlement is one that is led by regulators and supported by a regulatory framework," Joshi said.
She goes on to explain the problems associated with gridlocks in the settlement processes due to sequential processes that could grind a banking system to a halt. The other interesting aspect is liquidity. RTGS is great so long as it does not eat into available liquidity. But by its very nature, it does. Net settlement is not a viable alternative due to a lack of speed.
Joshi says that as electronic payments volumes grow, so will the pressure on the existing systems. With distributed ledger systems, regulators and central banks can leverage the existence of multiple "original" copies of the same transaction on each participants records. Every participant does an electronic handshake simultaneously and that pretty much settles the transactions instantly through smart contracts. There is no need for a "trusted" intermediary to play a policing role, though notary nodes could play a validation role. In return for this, the central banks will be potentially able to mitigate gridlock challenges. Also, because there will be no need for gross settlements as each transaction is completed in real time, there is a strong case for distributed ledger systems to act as liquidity saving mechanisms.
Joshi has had senior leadership roles in Visa and MasterCard. She has deep domain expertise in payments (authentication, risk, processing and innovation). After over 17 years of working with these organisations, she decided to step up to the challenge of driving financial inclusion through systemic innovation. AtCash's focus is not just on building CBDC-based interbank settlements but is equally on solving payments in the last mile. The JPMorgan report describes a "narrow bank" where it's entirely possible that salary and social grant recipients from government sources no longer require a banking or a mobile money intermediary for receiving funds into their wallet accounts.
In any case, there are large sections of the population that the banking industry does not want to or cannot penetrate because of legacy costs and processes. Migrant workers, blue-collar workers, students are just some examples. In such cases, the central banks could directly inject funds into these wallets. The outcome could be transformative - cut down on printing currency notes for this segment and at the same time bring them into the regulated financial system quickly and efficiently.
AtCash is a Delaware-based company and is closing its incorporation in the Dubai International Financial Centre and In5 in the UAE. The initial focus is on central banks, financial institutions and other entities exploring blockchain in the Middle East and Africa region. Thereafter, there are plans to expand to Europe and Asia.
Joshi adds: "The leadership team is majority women not by design but because they just happened to be the best people for the job."

The writer is founding partner at BridgeDFS, a bespoke digital financial services advisory firm (www.bridgeto.us). Views expressed are his own and do not reflect the newspaper's policy. He can be contacted at sanjiv@bridgeto.us.