From Demonetization To Democratization: Will Blockchain Help Or Hinder?

Jean Loh

There’s a major shakeup happening around the world in the use – or disuse – of cash. India demonetized its largest cash bills and started to move towards electronic currency. Other countries are following suit. In the sharing economy, for those offering services like Airbnb and Uber, there are no cash transactions at all. And even large retail chains are beginning to accept mobile payments.

What’s disrupting our relationship with paper money and driving this digital makeover?

This question was the focus of the March 29, 2017 “Coffee Break with Game Changers Radio” episode, presented by SAP and produced and moderated by Bonnie D. Graham (follow on Twitter: @SAPRadio #SAPRadio). Joining Bonnie were thought leaders Rajeev Srinivasan, adjunct professor of Innovation at the Indian Institute of Management in Bangalore; Simon Bain, CEO of SearchYourCloud.com; and Nadine Hoffmann, global solution manager for Innovation at SAP. Click to listen to the full episode.

Blockchain’s role in creating a cashless society is still up for debate

Rajeev explained how blockchain – the digital ledger in which transactions made electronically are recorded chronologically and publicly – can potentially reconstruct today’s economy. He cited demonetization in India, where blockchain can feasibly support a cashless society. “In one fell swoop, Narendra Modi, prime minister of India, removed 86% of currency notes. He did this, even though it would be a bit inconvenient, to reduce corruption, bribing, and ‘black money’ – money that’s hidden. We’ve had a history of about 5% to 10% of people actually paying tax, which means that those who are actually paying bear a huge load for all the deadbeats. And I think the prime minister also thought this would be a good way to boost the economy.”

Rajeev noted that the benefits of Modi’s decision outweigh the fear of hyperinflation because the poor will benefit faster from economic growth, rather than letting the corrupt and wealthy hoard and hide money.

Simon countered that, even though the intent is “admirable,” demonetization is hurting the wrong people. “It’s the unbanked who will get hurt in this shift. It’s the people who have worked in a cash economy because, for whatever reason, they won’t use a bank – their credit rating isn’t high enough or there is no bank near their village. What about the guy who doesn’t have a computer, who doesn’t have a smartphone? He can’t function in a cashless society.”

Simon underscored that, although studies from the World Economic Forum have revealed that cell phones are ubiquitous across all economic levels worldwide, these devices are typically “the good old-fashioned Nokia phones we all had many years ago.” In his opinion, there are other proven banking methods used in Africa, such as SIM cards, known as Inpeso, that may help India. However, he noted that these are not delivering a form of demonetization or blockchain that governments and financial services are hoping to achieve.

Nadine took the position that a cashless society actually brings the poor, as well as others without access to the technology, into the economy. “Inpeso is an example of how people are connected to the cashless society. They can take part in the financial environment, which wasn’t available to them before. Blockchain helps us secure authorization and ease the transfer of money, which makes life easier. In the long run, it allows consumers to control their data and control what they want to do to take part in the economy.”

It’s time to reconsider current financial processes

After a lively roundtable conversation about the positive potential of blockchain, Simon offered a stark reminder that, while blockchain is a mechanism for enabling and securing transactions, it won’t secure the database. “The person who’s going in there to cleanse the database can get all the information out. Most security attacks do not happen in the cloud, on the Internet, or within an external environment – they happen internally. In some instances, blockchains are going to be too small to secure. You need a vast distributed network to make it properly secure.”

Rajeev echoed Simon’s concerns, adding that blockchain’s influence goes beyond financial transactions. For example, it is also used in other business dealings such as maintaining “tender red cards,” a term referring to purchases made through the government. “The government prevents this practice in India because it’s a big scam. You can walk into a land registry office and slip somebody some money. All of a sudden, someone else’s land is your right. It’s very difficult to undo that kind of mischief.”

Nadine agreed with her co-panelists, suggesting that these challenges signal the need to seriously rethink current processes. “Blockchain may be an easy way to get people on board who are not included in the economy and enable them to make payments through contracts. But I also see that the technology cannot resolve concerns around security. We have to take a step back and look at what’s possible. It’s not as simple as finding use cases. Find your criteria, do a proper analysis, and take the next step.”

Crystal ball predictions: Will blockchain deliver as promised by 2020?

While it remains to be seen whether the world becomes a cashless society, the realities of blockchain may help to shift how banks and governments look at the financial system.

Simon predicted that while nothing much will change regarding the use of cash by 2020, he hopes that people will start taking security and privacy seriously.

Nadine expressed a more bullish and optimistic view of the future – one of change and ease. “I see more unbanked people being part of the whole environment. There will definitely be a decrease in cash transactions, increasing the potential for a cashless society. But rather than harm us, this new reality will help improve processing.”

Listen to the SAP Radio show “Money’s Digital Makeover – Part 1” on demand.

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Jean Loh

About Jean Loh

Jean Loh is the director, Global Audience Marketing at SAP. She is an experienced marketing and communication professional, currently responsible for developing thought leadership content that is unbiased and audience-led while addressing market challenges to illuminate and solve the unmet needs of CFOs, CIOs, and the wider global finance and IT audience.