We have
all heard about black money and parallel economies that go around the world.
This is probably as big as the money flowing in the regulated economies of the world. This is money
hidden/ stashed away either is cash form or through some securities abroad and
brought back into the country in times of need through the hawala (informal value transfer system) route or converted
to white via a circuitous route of investing in the secondary market from a tax
haven funded using instruments like a promissory
note.
Black
money has existed from the time (if not before) regulation was brought
into the money markets.
So what
is the solution?
Make
money disappear! As simple as that!Quite
eye-popping isn’t it?
Most of you would say: “What nonsense?”
Yet I
would reiterate: “Make Money Disappear”!
Let us
be very clear about what I meant. Make physical
currency notes and coins disappear! Let us work with virtual currencies only.
Now the
zillion dollar question: How does a virtual currency help?
To understand this, we need to know the problem with physical currency. Physical currency mutilates, fakes can be printed and
most importantly, physical currencies can be transported physically leading to
a lot of unaccounted money. With virtual currencies these problems are
completely eliminated because of the very nature of these currencies. Also, it
is quite easy to track the audit trail of where each unit of currency has gone
and how. In a change from the current On-Us
banking where transactions happening within the bank don’t have to leave the bank’s
systems, in case of virtual currencies, all transactions should go via the Central
Bank or such designated system. By doing so, anti-money laundering (AML) and
anti-terrorist funding (ATF/ OFAC) can be tracked through a central system rather
than the disparate systems in place today. Any fraudulent activity done within
or by a Bank can also be closely monitored and consumer interests safeguarded. A
further benefit would be tracking the liquidity requirements of banks by the Central
Bank.
Implementation:
1.
Government initiative and propagation of
the idea within the country with the law-makers and bankers and in
international circles; especially at the BIS (Bank for International
Settlements, Basel) and World Bank.
2.
To understand and articulate the legal and
financial framework and bring this into being via a law passed by the
law-makers. A timeframe for the rollout should be set after understanding all
the pitfalls on the way and
3.
To understand the technical requirements –
both software and electronic – for individuals and businesses with a very high level
of security. The production of devices to be handed out to individuals needs to
be started once the technical requirements are articulated and accepted.
4.
Creation of a backbone infrastructure and
an e-mint to generate the requisite amount of money to replenish the entire
amount circulating in the system.
5.
Providing education of the new currency
system to everybody at the grassroots level. This is the most difficult and
costly process. But once this is done and the change accepted, there is no
turning back.
6.
To ensure that every person over the age
of 18 has a Bank account. Minors can also be allowed to create accounts but
this is not mandatory.
7.
Connect the Banks to a central agency
which would then pass on the required information (electronically and
automatically) to the Central Bank, the tax authorities and the government.
8.
The final step would be exchanging the
currency notes from all individuals in return for cash in their bank accounts
and devices. This process would have to be kept open for a period of 2 years
while everybody hands in their physical currencies and gets their e-wallets.
Positives:
1.
One of the best things that would happen
out of this is that a lot…and I mean a hell of a lot of trees would be saved
and a lot of metal can be used elsewhere for more productive uses!
2.
Counterfeit money through currency notes
would immediately be cut out. The entire economy would have to be running in
the regulated market.
3.
All kinds of nefarious activities that
would have existed using paper money trails would be stopped or can be tracked.
4.
Economic offences can be tracked and be
strictly enforced with a lot of audit trails happening on the money in
question.
5.
Transfer of money to the economically
backward by way of subsidies can be done easily. Account data mining would help
identify the poorest people for whom the subsidy actually needs to be targeted and
ensure that the money goes to that account directly and electronically.
Negatives:
1.
Implementation would take a decade maybe
more. Maybe initially, both paper and electronic currencies can co-exist. As
the spread of electronic currency increases throughout the country, the current
black money stashed would be quickly brought back and made to white. Firstly, a
sudden increase in earnings can be tracked by the authorities. Secondly, in the
long run, once electronic money is in place, the negative point would be
eliminated.
2.
The cost factor is a big stumbling block.
Implementation of the currency-grid across a country, regulating banks to play
the role of enabler, bringing about small devices to actually enable the
transfer of money with adequate security levels and providing bank accounts and
educating the poorest of poor in the usage of these devices all of these
activities have a very high cost involved. But the tradeoffs over a longer run
are much, much higher. It would enable a true economy. It would eliminate the
need for tax returns since every earning can be cut at source. The tax mop-up
from every taxable person would be considerably higher. And the aim of this
article of removing black money would be met.
3.
The biggest threat to this idea is
security. For this I propose an e-wallet smartcard with finger-print scanning
technology. For any cash-based transactions, this card would not allow
transactions more than a preset amount (say Rs.5000/-). Even if there is a risk,
it is minimized considerably.
4.
The problem of tracking racketeering through
promissory notes would still be a grey area albeit the tracking to individual
accounts would be far easier. But in case these are maintained in offshore
accounts, it would remain tough to track them.
5.
A barter-based parallel economy might arise
where actual funds transfer would not be done but rather a mutual understanding
is reached for transfer of goods and services.
Note:
This is
my first attempt at trying to find a process of uncovering black money and
bring in a regulated economy. Your comments and suggestions would help me redraft
this into a more implementable form.
Addendum:
What are promissory notes?
A promissory note is a legal instrument (more particularly, a financial instrument), in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time
or on demand of the payee, under specific terms. If the promissory note is
unconditional and readily salable, it is called a negotiable instrument.
