Friday 21 September 2018

Digital Smart Money - Implementation Framework

Digital smart money could very well be the next disruption hitting the finance market. However restricted money has been in use for many years now. The food coupons that many companies give its employees is a good example of smart money. Currently, Sodexo, is a good example of that. They have different coupons for food, shopping, etc. The various gift cards from the retailers or flying miles that we get by flying a particular airline is also a kind of restricted or smart money.
Image result for digital money
To implement a full-fledged, government/central bank led smart money ecosystem, there are multiple things that we need to take into account.

1.     Regulatory framework

As explained in the earlier courses, regulatory framework is becoming more open in certain cases and stricter in some other cases. One such strict area is w.r.t KYC and ensuring that money is not being used or transferred for terror funding. Various new laws are coming up across the globe for this.
This necessitates a clear and secure regulatory framework to handle smart money. Some of the key legal requirements would be –

  • Identify the nature/type of smart money
  • Identify payer
  • Identify payee
  • Identify actual usage
  • Ensure honoring of the payments

Ensuring that these aspects are being tracked will mean there is less chance of money going into the wrong hands and also reduce frauds.
We also need clear taxation laws for the different types of restricted money based on the usage and restriction types

2. Usage types
A clear framework of usage types is needed. Currently, currency used in one country can be exchanged with that of another country based on exchange rates. This is because there are not “types” of currency. All currencies are “generic”. However, with the advent of smart money, we will have to define a clear framework of usage types that is acceptable across the globe. Once we have that, it will becomes possible to exchange the smart money across various countries if needed. These usage types will have to be generic enough to be used across countries and specific enough to be differentiable.
e.g. Food money, Infrastructure money, etc.

3. Restriction types
While smart money is restricted in its use, it is important to note that it is finally money – that has to have following important characteristics

  • Medium of exchange
  • A unit of account
  • A store of value

If we take the “store of value” into account we see that if we have some smart money with restriction on its use, it loses its value if the restriction is not fulfilled. While, this may be correct for certain usecases, it may not be correct for certain other usecases. Hence a differentiation is needed in the type of restriction. The proposed type of restriction is –

  • Permanent restriction – Restrict the usage type permanently. There’s no way to change it at any point of time. This type of restriction should be used only when there are clear guidelines and associated taxation and other laws mandate it to be this way
  • Temporary restriction – This will provide a time bound restriction. Once the time period is over, the unused smart money can either be changed to some other form or can be stopped from usage. E.g. if a donation for a specific usage like building a house is given to a charity organization for 1 year, the payer can decide to stop the usage of that money if unused after a year

4. Usage ecosystem
Once the whole framework of usage, restriction and legal is ready, a robust usage ecosystem is needed. Usage ecosystem will need 5 important aspects to be clearly defined and built-

  • Creation – Smart money will have to be “created”. The central bank could be the creator of smart money for each country. It will have to ensure all the frameworks are in place and all software is in place to effectively generate specific amount of smart money while ensuring compliances
  • Distribution – Once the smart money is created, it needs to be distributed into the market. E.g. companies will need to take the right amount of money through the banks and then distribute it to its employees as part of their salary. This distribution through banks, and other ways will have to be clearly formalized like it is today for general money
  • Exchange – Once an individual has the money, how is it exchanged? This becomes a critical component of the ecosystem. Today’s credit cards or debit cards are catering only to general money. The other specific cards (Sodexo, shopping cards, etc.) are specific to a type of smart money. We will have to come up with a distribution and exchange mechanism where different type of usage money is easily manageable and exchangeable rather than having different machines and cards for different types. One way to do this could be have a common card with different types of money and giving the option in the receiver’s card machine to take from the correct account. Another could be to enable mobile wallets that can hold all types of smart money and user can select which type to use during payments. With the advent of NFC and other technologies in conjunction with wide proliferation of smart phones in the population, this could be the best way to handle it.
  • Interchange – A corollary to exchange between two parties is the changing in the usage type of the smart money. This should also be possible; however, the legal/taxation compliances will have to be taken into account while doing so. This will be a critical component of the overall usage ecosystem
  • Withdrawal – Central bank needs to periodically withdraw and infuse cash in the system/market to maintain a good liquidity ratio and control the macro economics of the country. Hence, withdrawal of smart money should also be possible depending on the need

5. Governance
Governance becomes the most critical aspect of smart money. Even in today’s world, with only one type of currency, governance of money at macro level and micro level is extremely important. With smart money, it will become even more critical because of the sheer different types of money and the possibility of interchange between them. Having a central regulating system to govern this might not be the best way to do it. There are two possible options –

  • One central regulating system for one type of smart money – This will mean there are multiple regulating systems and then a common regulating system residing on top of it for central control on interchange
  • Second option is to have distributed governance on this based on block chain technology. Given the nature of block chain technology, it seems possible to have this kind of governance model. However, more studies and innovative solutions will have to be brought into picture if this is to be done

Smart money, is here to stay and digital smart money is very likely to be next disruption in FinTech. We may be on the verge of starting this new disruption and hence having the right framework in place now, finetuned by the best minds in the world would be the way to move forward.

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