First thing first, I want to make sure you know what demonetization is and why do Governments do it OR why is it needed! Did I just say it is needed? Yes, I did.

What is Demonetization

As per Wikipedia, the withdrawal of a coin, note, or precious metal from use as legal tender.

Simplified Version - Free Coffee Story

Suppose you are a coffee store owner. You came up with this amazing idea of loyalty. You give a piece of paper (stamp) with your sign on it to people when they visit. With every 10 stamps they collect, they get a free coffee.

One day, you figured your competitor started forging the the same stamps you do and he is distributing it for free. Literally free. Take as many you please. Now, people can simply come to your store with those stamps and drink free coffee.

Would you like that? I presume NO.

Simplest solution is to stop respecting the stamps and refuse coffee to PEOPLE. But this option is against your value system and people will lose trust in you which you can not afford.

What are possible actions you can take? Maybe Spread the word and change the existing stamps to more secure and hard to copy stamps. Something on a special paper which only you have access to!

Infact you did the option 2, spread the word and changed every stamp returned to you. No doubt, you had to replace the forged stamps as well but for the greater good. You became popular. Your stamps were rock solid and people trusted you even more.

After a few months, you realized some discrepancies. You found someone was selling stamps like yourself, not on exact same paper but close enough. Close to such an extent that normal people could not tell the difference. They were innocent and bought stamps in some discount thinking the seller is legitimate. But you could spot the difference. Now you are again in same situation as you were before.

Yes, you can repeat the same solution with more secure stamps and better paper but this will not change the situation much. All it will do is buy you sometime. You need a better solution.

Accounting

Times have changed and accounting has matured a lot. You figured, you could keep track of your stamps using some book-keeping and this will leave a limited scope of bad doing. Now you have record of who has how many stamps. You could not think of anything could go wrong.

Your store is flourishing. Few years have passed and many many stamps are issued and a few are redeemed. You own many stores now. Each store can issue stamps. You felt relief.

One day, you hear another issue. You find a few loopholes in the system. A few of your employees are giving people less stamps but reporting more. Ultimately, they are getting hold on legitimate stamps and accounting is done right as well. The only problem is they are misusing the identity of users while redeeming (even worse, checking the identity) and system is flawed.

To make the situation worse, you found another blunder. You got to know people are barterting your stamps for the stuff they need. They trust in your stamps so much that they started trading. Not to forget, a lot of stamps were lost, a lot of stolen/mugged, Ultimately your accounting does not match the real picture.

Solution

You figured you are yet again in same boat. You need to do something for those black market traded stamps. You decide to call the stamps back again. The catch is this time you have some records. So you can play smarter.

But you have to respect following

  • The legitimate stamps you gave
  • The valid stamps people traded

You want to cut your losses on

  • Stamps given by your cunning employees
  • The stolen/lost stamps
  • Stamps traded for illegal activities and in illegal ways

I believe you can imagine the complexity of the system. It is not as simple as calling the stamps and replacing. If you do this, you will make every stamp legit which you want to avoid.

You announce “Everyone is supposed to replace the existing stamps with newly printed stamps and the catch is you can do only if we have a record.” The twist is this way you might piss off many people who traded your stamps having faith in you. So you add a condition, you say everyone can replace the stamps to a finite number, say 1000 per person UNLESS you have a record/proof from where you got the stamps.

This way you settled on a mid way. Not everyone was happy but not anyone suffered a lot, specially people with documents/proof.

Demonetization, The Normal Way

You are already familiar with the need of calling the stamps back and you are familiar with the conventional way of replacing the stamps. The whole process is chaotic. People need to manage time to replace your stamps. Sometimes there might be queues in front of your stores and sometimes it leads to stampede. But benefit is straight forward. Not every stamp will find its way to your store. You will be liable for lesser stamps floating in market and you will eradicate black market stamps.

One catch here is you need to be careful when you are announcing the demonetization. You can not be vocal about it in advance. If you shout about it well in advance, it loses the whole purpose. People with black market stamps will find ways to give those to people with legit books.

One more problem is you will lead to the same situation again in sometime. Usually in couple of years. If you replace the old dead stamps with new. People will repeat the same process, find loopholes, trade, steal and so on. Every couple of years you need to call the stamps back.

Demonetization, the digital way!

Wait, is there a better way? We live in 2019. How about demonetization and transitioning to digital cash in one shot. We know it is a very bad idea to be vocal about demonetization. It has to be sudden.

But you could prepare in advance. You could ask your accounting department to start giving new stamps in digital format where each transaction has a record attached to it (even people are doing it among themselves). You prepare the system and it is not digital + physical both.

Combine the normal way with the digital way

  1. Enable your stores to accept the digital payment (redemption of stamps), nobody will doubt you for doing this. This is just a new way
  2. Ask your customers to register in your new digital Software
  3. Maybe you prepare machines which accept the stamps and deposit the digital stamp in their accounting

The machines can deposit without asking the proof with some cap, say 1000 stamps per person per identity. After that, it will ask the same proof as we discussed in the normal way.

The benefit of this approach is the whole process will be faster compared to printing stamps, having manual intervention of distributing and repeating the whole demonetization process again after some years.

I would love to know your point of view. Comment below.

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