UPI is world-class and it’s time to take it international
While cryptocurrencies like Bitcoin and Facebook’s Libra can enable efficient cross-border transfers, India’s existing UPI system, with its robust digital payments infrastructure, already meets the country’s needs and can be internationalized without relying on blockchain technologies.
This article was first published in The Mint. You can read the original at this link.
Cryptocurrencies are peer-to-peer electronic cash systems that are governed not by the authority of a central bank, but by digital code. Transactions are only added to the common distributed ledger if they can be validated in accordance with the rules stipulated by the code, ensuring that digital currency once spent cannot be re-spent. For everyone who uses the same blockchain, its distributed ledger becomes a common source of truth that allows them to carry out peer-to-peer transactions without the need for validation by a central entity.
Bitcoin is one such cryptocurrency. It uses a decentralized, permissionless system that allows anyone to validate a transaction, so long as they meet the technical requirements for operating a node. However, Bitcoin prioritizes decentralization over speed and scalability. As a result, it is incapable of processing transactions at the velocity or volume that modern financial systems demand. As there is a finite limit to the total number of Bitcoins that will ever be minted, its value fluctuates wildly, resulting in the sort of volatility that is undesirable in a currency.
Facebook recently announced the launch of a new cryptocurrency called Libra, which, it claims, will address the many failings of Bitcoin. Libra has been designed to operate on a bespoke blockchain running on at least 29 nodes and backed by a basket of bank deposits and government securities to ensure low-volatility. For the foreseeable future, Libra will function as a permissioned cryptocurrency to achieve the high transaction throughput and low latency functionality expected of a global payment system.
Libra will be most useful for underdeveloped countries that lack a digital financial infrastructure. It will offer them a safe and cost-effective mechanism for making payments that will scale effortlessly in places where the use of Facebook and WhatsApp is already widespread. When combined with social media data, it will allow developers to come up with innovative new products that incumbent financial sector players will be hard-pressed to match. As the value of a Libra today is designed to always be close to its value tomorrow and in the future, it will operate as a currency hedge in countries where exchange fluctuations are high.
I read the Libra White Paper with interest, keen to understand how this new cryptocurrency would change things for us in India. We are Facebook’s second largest market outside the US and any financial product it launches is bound to have an impact on us. However, the more I read, the less convinced I was that Libra was going to give India anything that it did not already have.
In Unified Payments Interface (UPI), India has a robust digital payments infrastructure that, within just three years of its launch, already effortlessly processes more than 750 million transactions a month. We have a network of business correspondents throughout the country who integrate our online and offline payment systems by converting digital payments into cash and vice versa. While we may not yet have the data advantage that Libra promises to bring, once the Data Empowerment and Protection Architecture is fully implemented, it will give us an entirely new way to build financial products using its digital consent infrastructure. Admittedly, UPI isn’t decentralized, but given how difficult it is going to be to migrate away from a permissioned architecture, it’s not as if Libra really offers much better.
That said, there is at least one thing Libra has going for it that UPI does not—the ability to radically transform how cross-border transfers are effected. India receives more inward remittances from its diaspora than any other country in the world ($79 billion in 2018). At present, all the mechanisms for international transfer of funds are costly, cumbersome and highly inefficient. A digital currency like Libra, pegged as it is to a basket of stable currencies, and transferable anywhere in the world, will offer overseas Indians a cheap, digital way to move money to relatives back home at a fraction of the cost that they currently spend.
In its report on deepening digital payments, the Nandan Nilekani Committee has recommended that it is time to take UPI global. Several different options have been proposed, including amending UPI protocols to include currency conversion support and directly connecting UPI to global payments systems to allow immediate, low-cost remittances to take place over the UPI system. There was also a suggestion that UPI specifications and technologies should be licensed to operators around the world to allow the protocol to spread outside India. This must be accompanied by amendments in Indian regulations, so that Indians can use UPI from abroad in much the same way as Chinese citizens use WeChat from wherever they are in the world.
Cryptocurrency-based payment systems are slow and computationally intensive. While the technology can be optimized, we will keep running up against its inherent limitations that make it hard to scale to population size. UPI may not be decentralized, but we know it works well at scale even over the sometimes patchy mobile networks in India.
There is no need to optimize blockchain technologies to meet the needs of developing markets when we already have a proven, world-class digital payments protocol in India that can easily be internationalized. Let’s back ourselves and just do it.
