Published: Sep 22, 2022, 10:00am
Before we start, let’s go back to 1983 when David Chaum came up with the digital currency called ecash.
Following the digital currency hullabaloo, between 1983 and 2007, many virtual currencies were launched and disappeared. Because by then, eCommerce customers were devoted to credit cards.
Later, decentralised and anonymous money became the foundation for Bitcoin. Satoshi Nakamoto introduced cryptocurrency through his white paper–Bitcoin: a peer-to-peer electronic cash system.
Nobody knows Satoshi’s true identity.
Who he is or who they are is perhaps a conversation for another day.
Today we will talk about the difference between crypto and the digital rupee. And the possibilities sparked by RBI’s digital rupee.
In simple terms, cryptocurrency is decentralized money, free from any government or central bank’s chains. It relies on blockchain technology and uses cryptography to secure transactions done by people making it impossible to counterfeit.
However in August 2010, a hacker found a loophole in the Bitcoin protocol. The hacker exploited the vulnerability and created an infinite amount of Bitcoins by making multiple transactions before logging them into the blockchain.
The user created 184 billion Bitcoins in a few hours, but his plot was discovered, and the transactions were invalidated. To date, this has been the only threat to the Bitcoin network.
The purpose behind the creation of Bitcoin was to help people send money over the internet. It is a digital currency, an alternate payment system free from any control that works exactly like traditional currencies.
To better understand cryptocurrency, you must know about the three terminologies: blockchain, decentralisation and cryptography.
The information and access are shared among the registered users. So, anything the blockchain records is transparent and immutable–the information cannot be tampered with or hacked. Not even by the administrator.
All cryptocurrencies are generated through a rigorous process called mining. The miners use computers with high-end GPUs to solve various complex mathematical problems and puzzles to get cryptocurrencies as a reward. It takes days and even months to mine crypto.
People can also buy cryptocurrencies from currency owners and exchange platforms, and they can even sell them to other individuals, too. The cryptocurrencies are stored in digital wallets, which are either hot or cold. A hot wallet is connected to the internet. In contrast, cold storage keeps your holdings offline.
Cryptocurrencies can be transacted or transferred using your smartphone – just like a UPI transaction. Users can also convert their crypto holdings to cash using their bank accounts or P2P transactions.
Of course, while Bitcoin remains the popular choice for miners and investors, it did start a digital currency revolution that led to the birth of many popular currencies like Ethereum, Tether, XRP etc.
Cryptocurrencies are immune to any central authority or government interference. However, their relationship with the Indian government has been quite uncomfortable.
But is digital rupee cryptocurrency? Here’s some context.
The rupee is a currency that the RBI issues and the digital rupee will have the same function, but it won’t be a decentralised asset like cryptocurrencies. Digital rupee will be a currency issued by central banks responsible for governing and managing the asset.
The digital rupee will be a legal tender, which means you can use it to buy what you want. For example, digital wallets, NEFT and IMPS are examples of digital rupees. So, when the RBI starts circulating the digital rupee, all citizens of India can use it.
After the announcement of the digital rupee, India’s Finance Minister Nirmala Sitharaman, said, “the CBDC would strengthen India’s economy, increase efficiency and lower expenses of the country’s currency management system, and provide a stable, regulated digital currency that will compete with private cryptocurrencies.”
According to the RBI, “a CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.”
But a CBDC can’t be compared to cryptocurrencies.
“Unlike cryptocurrencies, a CBDC isn’t a commodity or claims on commodities or digital assets. Cryptocurrencies have no issuer. They are not money (certainly not currency) as the word has come to be understood historically,” as said in the announcement made by RBI.
The CBDC is the digital avatar of paper currency issued by central banks like RBI and should be exchangeable with cash.
With the recent popularity of a cashless or digital financial framework, world governments and central banks are exploring (some of them have also implemented) the possibilities of digital currency.
The Bahamas, Nigeria, Dominica, Montserrat, Antigua and Barbuda, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines have already launched their digital currency.
Russia – the Digital Ruble has completed the initial trials–full cycle of transactions as announced by the central bank of Russia.
China – plans to launch the eCNY or digital Yuan by 2022.
The most important reason for launching a digital rupee by the RBI is to push India forward in the virtual currency race. And, of course, due to the growing importance of cryptocurrency.
But with a behemoth payment system like UPI around, can CBDCs up the game?
According to a survey by the RBI, cash remains the preferred mode of payment for receiving money for regular expenses. Cash is used predominantly for small value transactions (amounts up to INR 500).
All cryptocurrencies like Bitcoin, Ethereum, Litecoin etc., won’t be exempt from taxation.
Only RBI’s digital rupee will be free from tax regulations.
Read our guide on How Cryptocurrencies Are Taxed In India.
By introducing the digital rupee, the RBI expects to address problems associated with existing physical currencies and cross-border transactions.
Cross-border money transfer and converting the money into foreign currency is tedious and expensive. With the launch of the digital rupee, the instant cross-border money transfer is set to make bank cash management and operations more seamless.
In India, cash placement and tracking the same is a challenge. CBDC can address anonymity and resolve it in a non-intimidatory way and reduce the demand for cash. The government will save operational, printing, distributing and storing costs–empowering the government’s vision toward a cashless economy.
Kunal is the co-founder of Freo. He is a serial entrepreneur and has founded two other companies prior to which, he spent seven years in the field of technology, research and development and engineering in and outside of India. Kunal has a bachelor’s in technology from IIT Roorkee and holds an MBA in marketing and strategy from ISB, Hyderabad.
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.
Post expires at 4:33pm on Thursday March 23rd, 2023