India must set benchmarks on digital security

As India gets ready to embark on a complete digital journey, there are bound to be questions on security issues. As the government continues to roll out new initiatives it becomes imperative to evaluate the viability of these initiatives for India. On evaluation, it has been observed that despite a radical introduction to many unique ideas for a cashless system, there have been incidents of Aadhaar biometric data breach, leak of Aadhaar details and illegal access to bank accounts via UPI reported recently that raised questions about the vulnerability of the Bhim-Aadhaar platform.

Such breaches can be nerve-wrecking, especially as the banking system is meant to be a highly secure with high volume transactions reflecting a deposit of '104.69 trillion as of December 2006. With the population relying on their hard-earned savings, it will be detrimental if accounts are compromised, resulting in a potential loss of one’s savings. Hence the breach through Aadhaar Pay is bound to create a scare.

Prior to Aadhaar Pay, the closed access system of the banking network ensured utmost security and privacy, with the bank holding the onus of the control of any of its transactions. Ample security measures were taken even to establish connections with other banks. With Aadhaar Pay, the ease of use and mass appeal also brings the associated risks with the banking system open to the entire population to make multiple transactions via applications that have been developed and operated by third parties. The sheer volume of transactions exposes a significant risk even for a small probability of security failure. Hence, in such a scenario, there is a high demand for the use of e-money or cash for day-to-day low-value payments. This method isolates the bank account from these payment modes, securing the user from the risk of losing all their hard earnings, in the event of their e-wallets or physical wallets being stolen or misplaced. At this juncture of digital India, there is a lot of buzz around promoting non-bank account based digital payment services to give people choices between convenience and security. These have shown tremendous popularity especially when going cashless was the “only” mantra post demonetisation. At the same time, protection of consumer funds, interoperability and anti-money laundering are still concerns for the regulatory framework and the public.

One of the methods that can be evaluated for asserting such financial care is to link the e-money system to the banking system. For example, maintaining escrow accounts at commercial banks and only cashing out through banks and transferring between e-wallets through bank payment networks. The advantage of this approach is to capitalise the established strength of the banking system. Unfortunately, the disadvantage of this is increasing the costs of this service.

Therefore, an alternative way to facilitate a secure digital payment service is to leverage the advantages of an ideal currency like digital fiat currency, issued by the RBI with the same legal tender status as banknotes. By injecting digital fiat currency issued by the RBI into this e-money payment system, it takes away the possibility and overriding concern of phantom money being created within the system. Digital fiat currency is being researched as a viable option in not just India, but is being tested by several central banks globally. As India embarks on its digital vision, it becomes imperative to evolve with the most advanced, strategy that will be easy to translate in a country that has a diverse population. Digital fiat currency is the payment instrument which reinforces the essential trust to the digital economy. As India marches towards setting new benchmarks, it is noteworthy that a digital tomorrow is the wave of the future, which we can endorse as a trendsetter.

The writer is a former head of Credit Suisse and Lehman Brothers in India