The active digitization of large domestic financial institutions is a marked positive trend. Russia is one of five world leaders in the rapid transition to cashless payments, and the number of contactless transfers and payments is increasing every year. This dynamic development requires changes in legislation, and many professionals and representatives of the financial sector are addressing the issue of cryptocurrencies and their place in the modern financial world.
In this case, the policy of the Bank of Russia is mainly aimed at removing the stain of rhetoric about cryptocurrencies. The National Central Bank does not consider it appropriate to define a cryptocurrency as property at the civil law level, but it does allow it to be treated as property in accordance with certain laws, including the anti-corruption law.
On the topic: Russia is leading the International Stable Currency Initiative
Cryptocurrency is well-known as a means of laundering money in a criminal manner and negatively affects the stability of financial systems. According to the central bank, there are reasons to tighten control over monetary transactions, improve transparency, and most importantly, there is an incentive to develop an alternative such as the digital ruble. It will be a digital currency, successfully implemented in many regions of China by the People’s Bank of China, and many countries are in the testing phase.
On this topic: Russia is updating its laws on cryptocurrencies
What changes will the digital ruble bring about?
First, it will increase availability and reduce the cost of payment services. This is a concern for many banks as it can lead to customer failures. Frightening, comfortable, and less expensive central bank e-wallets can become more user-friendly for the applications you currently use.
Cryptocurrencies, unlike the digital ruble, do not meet the interests of the monetary and tax regulators and do not require a central obligator. However, the payment system in Russia is completely developed today: instant transfers are available to users along with QR codes, contactless payments and convenient interfaces for banking applications. So the attraction of switching to the digital ruble for consumers is far from clear. Banking institutions are not concerned with public access to information related to clients’ accounts and transactions. The introduction of the digital ruble would result in the central bank becoming the sole owner of the database.
In addition, the digital ruble can be distinguished as a separate type of money, which has the advantages of digital currency (electronic currency) and paper money, which have individually defined characteristics similar to the series and number of banknotes. Proponents contend that in the long term this will lead to the complete elimination of the shadow economy and the impossibility of money laundering, as every step in a digital currency transaction can be easily traced.
What are the technical implementation mechanisms of the digital ruble provided by the Central Bank of Russia? It is considering three options: decentralized distributed ledgers, a centralized database, and a hybrid option that includes a mixture of the first and the second.
The use of distributed ledgers and a hybrid alternative can provide a higher level of transaction security, which has been advertised as an advantage by supporters of the digital ruble. The disadvantages of these alternatives include the relatively low productivity compared to the second alternative, as well as the lack of a generally accepted application of accounting and other reporting standards.
The central master alternative wins the ability to handle high workloads, but loses due to weakness. It also means that all user data is stored in one place, and access to it is completely under the control of the central bank. This storage system is currently used by most commercial banking institutions and the central bank does not give an advantage over them. Hacking a central storage database is easier than accessing the keys for a blockchain-based system. So any central database is more vulnerable to cyber criminals in advance.
If the central bank chooses decentralized distributed ledgers and smart contracts during the launch phase, this will affect the speed of transactions, as the central bank indicates in its report, but security will improve.
The Bank of Russia offers four digital currency models. The first involves the introduction of e-wallets by the central bank into other financial institutions for interbank settlement without the participation of individuals and legal entities, although further development is not planned as the least promising.