FINANCE, Interviews

The Digital Ruble: Challenges and opportunities

Russia plans to launch the digital ruble in the near future. A law regulating the issuance and circulation of the digital currency has already been approved by the parliament in the first reading. At the initial stage, operations with the new tool will be available in test mode to a limited number of bank clients, but by 2030, the system should be fully operational. The digital ruble will become the third form of money available for circulation in Russia, along with cash and non-cash rubles. Digital rubles will be represented as unique digital codes stored in special-purpose electronic wallets. Artem Genkin, Doctor of Economics, President of the NPO Center for Protection of Bank Clients and Investors, spoke about the future of the digital ruble, as well as the opportunities and challenges posed by the innovation, as part of the Lecture Room for subscribers of the Alpina Digital corporate library, which is part of the Alpina Publishing Group.

Dr. Genkin, what challenges may follow the introduction of the digital ruble? Which of them are the most significant?

— I do not think the launch of the Central Bank’s digital currency (CVCB) will carry some definite inherent risk. Rather, we must think of it in terms of specific and even unique challenges for certain economic agents. First of all, commercial banks. Let me remind you that as of December 2022, total retail bank deposits in Russia reached RUR 37.8 trn ($460 bln). The holders of these accounts can convert their savings into digital rubles, issued by the Central Bank of Russia. Amid numerous bank bankruptcies, the digital ruble looks like a paragon of reliability. I do not believe that the “shallowing” of the bank deposit market can seriously affect large credit and financial players such as Sber or VTB. But small and especially regional banks may feel a bit shaky in the new conditions.

The algorithm for connecting banks to the digital currency platform is not fully clear yet. So far, the Central Bank is experimenting with market leaders. Other credit and financial institutions may join them later with limited access to operations with the digital tool, in which case they will also lose customers.

— Will there be any risks for individuals?

– We shouldn’t rule this out. For example, the details of their transactions and financial activity can be used to control or even restrict it – for example, the authorities can restrict their access to the financial system if they have unpaid fines. Theoretically, this is possible, but I doubt that it will actually happen. Much will depend on how the introduction of the digital tool unfolds, and whether the regulations are strictly implemented; the professionalism and integrity of officials responsible for upholding these regulations also matter.

How is the digital ruble secured?

— At the moment, it is not tied to any specific assets that would back it exclusively. The Bank of Russia is the sole issuer of currency in Russia; the regulator will be issuing the digital ruble as well.

The digital ruble is the Central Bank’s liability. What does this mean for users?

— As envisaged by the Central Bank, one more form of national currency will be in no way different from cash or cashless rubles. It will function as a lawful payment method, measure of value and means of saving. All three forms of the national currency will be equal.

I suggest that in the future, the digital ruble will be a valid method to repay debts or pay for goods and services without specific permissions from suppliers. I assume that conversion between the three forms of the ruble will be legitimate. Although the bill passed last December directly prohibits converting digital rubles to cash.

— Will cash and cashless rubles remain in use?

— We will still be using cash and cashless money without any restrictions although I can’t rule out that the digital ruble will be a prevailing method for certain payment niches. For example, the digital ruble can be used for certain types of social payments. That will not de-legitimize other forms of fiat money.

— Do you believe all transactions in Russia can eventually be performed using a digital currency?

— In my opinion, in the future, there is a risk of restrictions on operations with the conventional forms of the national currency – for example, restrictions on transfer amounts between individuals. It is possible that other measures of indirect de-stimulation will be introduced. However, I don’t believe that widespread implementation of digital currencies will happen so fast that they will dominate all payment niches. Yes, the share of payments will be growing and not only in budget financing but also in retail and P2P transactions. But it will not become a prevailing method in the next three to five years.

— Can the expiration term of the digital ruble become a way to stimulate the economy?

— This idea requires serious consideration. The Central Bank adheres to the concept of absolute equality between all forms of the ruble, including digital, cash and cashless. This approach concerns expiration term as well. Coins or banknotes do not have an expiration date. With an expiration term concept in place, the idea of equality will have to be revisited. In this case, tools will emerge on the market with different sets of characteristics and possibly different values. That may result in the forming of a parallel black market, which is an extremely serious risk for the economy.

— In the context of digital currencies, we often hear about “digital slavery.” How plausible is this prospect?

— Indeed, we have heard certain predictions and should not take them with irony. I even assume that in some countries, certain formats or designs of central banks’ digital currencies can actually make them into tools of digital control. However, this scenario is only plausible within a completely closed economy. The possibility of this scenario may be high in China but, in my opinion, it is below 50%. I can’t predict a similar development in Russia.

You can read more about the risks and challenges of the Central Bank’s prospective digital currency in my new book, co-authored with Alexei Mikheyev, Blockchain for Everybody: Cryptocurrencies, BaaS, NFT, DeFi and Other Latest Financial Technology. The book was published by Alpina Publisher this year.

Interview byOlga Blinova

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