Challenges of digital economy

Mubashir Hassan

Challenges of digital economy

Mubashir Hassan

The introduction of internet technology in banking has brought in its wake new concepts and

instruments like e-banking, Mobile banking, various cards like credit, debit cards, virtual cards

and e-wallets and e-commerce etc. One can transfer money, recharge phones, pay various types

of bills, perform online shopping and so on. We can buy and sell shares while sitting comfortably

at our homes. Then there is e-gold: you can have deposits of Gold in the electronic form and the

quantity simply mentioned in your accounts while the actual gold is held somewhere else and so

are your investments and bank balances. We cant foresee the new financial instruments and

gadgets we are going to have in future.

This type of economy or the Digital economy appears as thrilling, time and money

saving. No doubt it is advantageous, but these things are not so simple, there is more to it than

meets the eye. It heralds a completely new economic system which may not be as pleasing as it

appears. The present economic system is the result of long chain of historical events and

changes. To begin with, we had barter system which evolved into a more feasible system in

which precious metals like gold and silver were used as currency, followed the paper currency.

Initially Money lenders used to issue receipts for the gold which were used in the market place as

currency in lieu of the gold which was held by the money lender. With the passage of time

money lenders learned a trick, they issued receipts for far more amounts of gold deposited with

them and charged interest on the said receipts, as they were used as currency and slowly it

matured into full fledged monetary system based on paper currency.

In 1944 foundation was laid for the Bretton Woods which was to govern the

international monetary relations. As per this system the various countries of the world were now

to settle their international accounts in Dollars that could be converted to gold at fixed exchange

rate of $35 per ounce which was redeemable by the US government, or in other words the US

government was committed to back every dollar overseas with gold and the other currencies

were fixed to dollar which in turn was pegged to gold. As the dollars were now to be acceptable

and required in the international market, gold (real wealth) was transferred to US. (US today has

more than 2/3 gold reserves of the world.)

Then real shock in 1971, the Nixon shock. Various nations of the world wanted

redemption of the dollars held by them into gold. Fearing that it would have to return the gold

back to the demanding nations, USA cancelled unilaterally the convertibility of the dollar into

gold and began the era of fiat money. The USA and the other economies of the world were now

free to print out as much money as they wanted. There was no one to curb printing of currency.

Fiat money is just a form of currency which is not backed by anything nor has it any intrinsic

value. It is just the assurance of the issuing agency that lends it value. To make things worse the

banks multiply the money available with them through the process of Fractional Reserve Ratio.

To understand the concept let us consider that there is only one bank in the vicinity. Depositors

deposit Rs One Lac in it. The said bank loans out Rs 80 thousand out of it and the borrowers use

it in buying commodities, luxury items or property and in turn, out of these Rs 80K, Rs 70K are

again deposited in the said Bank. The bank again lends out say Rs 60K to some other borrowers

and the cycle continues and this way out of the actual Rs one Lac, the bank lends out Rs Five

Lac to ten lac depending on the circumstances and the regulations of the central bank. In case of

many banks in the system, there is little difference in the process as the borrowings of one bank

are deposited in the other banks and vice versa.

The consequences are that more money is available in the market leading to inflation, the

benefits are reaped by the upper class only, who use this extra money available in the system to

earn more and more and the poor suffer the adversaries of inflation.

The impact of the digital economy can be understood very easily in this backdrop. Firstly

there would be no actual use of currency, only the net based transactions would be there and one

cant say with certainty when the current paper currency based economy would be replaced by

the digital economy completely. The impact on money generation by the banks and the resulting

inflation can only be imagined.

There are also some other problems. The credit card ensures that you are always steeped

in debt and paying interest. The credit card coupled with the lure of advertisements on the online

shopping sites, you are tempted and encouraged to buy, as the scarcity of money is no constraint

to buy more. Your bank is there to pay for you and then you have to make adjustments with bank

on EMIs. You simply end up buying things you really didnt need and all that on credit and

interest. However, you forget that these new commodities come with a price, interest and all

that. Millions of rupees are being spent to trap you into this dirty consumerism. You consume

more and those big industrialists are benefitted. Your monthly credit bill piles up and at one

stage you are unable to cope up, you give up and the bank gets hold of your securities and the

properties.

In case you have some extra money and that too would be in e-form and mentioned in

your accounts. You may earn some bucks and the wrath of Allah. You cant do anything about it,

you have to keep your money in banks, as there would be no way to keep it anywhere else.

Presently there are proposals of Gold deposits in banks where you can deposit your gold in the

bank accounts and the bank in turn can lend it to jewelers on interest and a part of the interest

shall be paid to you. It is great temptation to fall into sin. You have extra gold lying in your

cupboard or in bank locker, why not deposit it in an account, ensure its safety and earn some

extra money? In other words you are asked to hand over your gold to a bank which in turn shall

give you a receipt on a paper or just as an entry in your e-account. (Dont forget Bretton woods

system and the Nixon Shock). Anyway you would be involved in Riba dealings and it would

appear as a normal process.

There is nothing to cheer about all this. We cant foresee where all this process is leading

us to. One can only imagine. In future all your cards, accounts and your identity may be

integrated in one card and all your bills, like electricity bill, water supply bill, gas bill may be

deducted from that card and in case of default, your supplies would be stopped automatically.

And may be down the line we may have chips inserted into our bodies, which contains all our

details, as a substitute to the cards.

We have gone so far that it seems difficult to retreat, the only end seems to be the conclusive

digital economy. That would be really hard times.

Email: mubashir_07@rediffmail.com

Mubashir Hassan Dar

S/o Manzoor Ahmad Dar

R/o Zirpora Bijbehara

Mb:;9419924672