The Digital Ruble: Pluses and minuses of the third form of national currency

 

Sergei Andryushin,
Doctor of Economic Sciences, Professor, Chief Researcher at the Institute of Economics of the Russian Academy of Sciences

 

 

 

In October of 2020 the Bank of Russia published the consultation report “The Digital Ruble,” in which it presented for the first time its project for a digital currency. After its public discussion, the bank released a “Concept of the Digital Ruble,” which showed the main elements of the design of the digital currency, described the models of emission and circulation of the digital ruble, and also specified the timeline of its release.

The digital ruble is the third form of currency of the Bank of Russia, and is identified by a unique digital code. The other two forms of money are cash and non-cash rubles. The digital ruble is released on the digital platform of the Bank of Russia and is an obligation of the CB. The introduction into circulation of the digital ruble may lead to a reduction in the role of cash rubles, and also affect the use in the economy of non-cash rubles accumulated in accounts in commercial banks.

The digital ruble is equivalent to the cash or non-cash ruble, and is in parallel circulation with them; for that reason the digital ruble is a hybrid form of money. Its appearance will lead to a partial outflow of funds to wallets with digital rubles, that is, to the redistribution of funds. All subjects of the Russian economy (citizens, business, and the state) will have the opportunity to credit digital rubles to their electronic wallets and perform operations (payment, settlement, and conversion) using user interfaces, mobile devices, and other media (for example, POS-terminals, ATMs) both online and offline.

To issue the digital ruble, the Bank of Russia will use Model D, a retail system with a hybrid digital currency, which was chosen due to the target priorities of the Russian regulator (its significant role in the monetary and payment systems, and some functions that it is ready to delegate to commercial banks). Therefore, in the conditions when the Central Bank seeks to minimize the risks of the negative impact of the digital ruble on the activities of commercial banks, the choice of model D is thoughtful and economically justified. Under the D model, the Bank of Russia is creating a digital platform, on the basis of which it opens wallets attached to the digital platform of the Russian regulator  – for commercial banks and the Federal Treasury (ensuring the registration and certification of their private keys), as well as on behalf of citizens and businesses through commercial banks (ensuring the registration and certification of their customers’ keys).

The transfer of the digital ruble from one user to another will take place through any commercial bank which is connected to the payment system of the Bank of Russia. This transfer will be carried out in the form of moving a digital code from one electronic wallet to another, without accruing interest income on the balance of the digital amount. And this is the principal difference of the digital ruble from existing systems of non-cash rubles, in which money is transferred by banks within their payment systems.

The Bank of Russia created the prototype of the platform of the digital ruble in December 2021, and already in February of this year, the first pilot group of 12 leading banks began testing it. It is expected that the testing will be carried out over the course of 2022 together with participants in the financial market. In the course of this are planned: the phased development of the digital ruble platform, the connection to it of commercial banks and the Federal Treasury, and the implementation of the full range of payments between the population, businesses, and the state. This will be followed by the introduction of offline wallets, the opening of digital wallets for non-residents, and enabling the exchange of the digital ruble for foreign currency.

 

Positive Aspects

● the creation of a new payment infrastructure, which will be built as an addition to the existing payment infrastructure, ensuring the rapid scaling up of the speed of transactions, and settlements without the use of monetary surrogates, as well as providing round-the-clock access 24/7/365 on uniform terms, and guaranteeing users the convenience and ease of converting the digital ruble into traditional forms of money

● the development of mechanisms for the technical implementation of the retail architecture of model D, offering the availability of modern IT-technologies, namely: the use of a voice interface and biometric identification, a digital profile, contactless and instant payment technology, smart contracts, and cryptographic algorithms. These technologies will contribute to the development of competition in the financial market, and improve the capabilities of client services, including in terms of software interfaces.

● increasing the level of information security in the process of circulation of the digital ruble, guaranteeing the confidentiality of information about consumers, seamless integration with digital platforms, round-the-clock access on uniform terms, and the ability of use offline

 

Negative Aspects

● The Bank of Russia considers the digital ruble to be a third form of national currency which will be used in circulation on a par with cash and non-cash rubles. At the same time, in official statistics, the digital ruble is planned to be taken into account in the aggregate of cash rubles (M0). Yet the digital ruble is a hybrid currency, and is expected to partially replace non-cash rubles included in the balance sheets of commercial banks  – and this is already an M1 unit. Otherwise, the digital ruble smoothly passes from the M0 aggregate into the M1  – which changes not only the structure of the monetary base, but also the amount of funds of commercial banks held in correspondent accounts with the Bank of Russia.

● The Bank of Russia does not explain anywhere how for commercial banks to neutralize the growth in expenditures or the cost of funding for the introduction of the digital ruble, which can accumulate in significant amounts in the consumer retail services market. All this can make significant adjustments to the interest rate channel of the monetary policy transmission mechanism, and therefore lead to a deviation in the medium term of actual inflation from the target level (4%).

● Nowhere has the Bank of Russia prescribed a mechanism for restoring digital rubles if customers lose their funds as a result of fraud or lose their mobile device

● As a basis for the reliability, security, and high degree of protection from fraud of digital rubles, the Bank of Russia has created a very transparent payment system that guarantees the confidentiality of the client and his transactions, but not their anonymity (which, for example, cash rubles offer). Therefore, the digital platform of the Bank of Russia (which stores one register and several backup copies) is subject to a high risk of hacking. This platform will always need additional means of protection related to the prevention of unauthorized access by fraudsters to customers’ digital wallets (using social engineering methods), the growth of information security risks (maintaining the confidentiality of the customer database), and prevention of double spending on the digital platform (when digital currency with a cryptographic information protection system can be spent twice).