Before we begin, let’s go back to 1983 when David Chaum invented the digital currency called ecash.
After the digital currency chaos, many virtual currencies were introduced and disappeared between 1983 and 2007. At that time, e-commerce customers were addicted to credit cards.
Later, decentralized and anonymous money became the basis of Bitcoin. Satoshi Nakamoto introduced the 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 may be a conversation for another day.
Today we are going to talk about the difference between crypto and the digital rupee. And the possibilities that the digital rupee opens up for the RBI.
What is cryptocurrency?
Simply put, cryptocurrency is decentralized money, free from any government or central bank chains. It relies on blockchain technology and uses cryptography to secure human-performed transactions, making counterfeiting impossible.
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 conducting multiple transactions before logging them onto the blockchain.
The user created 184 billion bitcoins in a few hours, but his conspiracy was discovered and the transactions became invalid. So far, this has been the only threat to the Bitcoin network.
The purpose behind the development of bitcoin was to help people send money over the internet. It is a digital currency, an alternative payment system that is free from any control and works just like traditional currencies.
To better understand cryptocurrency, you need to know the three terminologies: blockchain, decentralization, and cryptography.
- Cryptocurrency blockchain is the showrunner. It is a digital ledger with access distributed to authorized users and records transactions.
Information and access are shared among registered users. So everything the blockchain records is transparent and immutable – the information cannot be tampered with or hacked. Not even from the administrator.
- Decentralization in cryptocurrency means that the asset is free from government agencies such as central banks. This mechanism makes cryptocurrencies independent. At the same time, the centralized money we use is monitored and managed by the Reserve Bank of India (RBI).
- Cryptocurrency cryptography means secret writing, which means the recipient can only read messages. It takes care of the transactions, protects operational autonomy and strengthens the entire chain.
How does cryptocurrency work?
All cryptocurrencies are generated through a rigorous process called mining. The miners use computers with high-end GPUs to solve various complex math problems and puzzles to get cryptocurrencies as rewards. It takes days and even months to mine crypto.
People can also buy cryptocurrencies from currency holders and exchange platforms and even sell them to other people. The cryptocurrencies are stored in digital wallets that are either hot or cold. A hot wallet is connected to the internet. In contrast, cold storage keeps your assets offline.
Cryptocurrencies can be settled or transferred using your smartphone – just like a UPI transaction. Users can also convert their crypto holdings into cash via their bank accounts or P2P transactions.
Although Bitcoin remains the popular choice for miners and investors, it has naturally sparked a digital currency revolution that has led to the birth of many popular currencies such as Ethereum, Tether, XRP, etc.
Cryptocurrencies are immune to any interference from central authorities or governments. However, their relationship with the Indian government was quite uncomfortable.
- April 2018 – People have been warned that virtual currency is not legal tender in India. The Treasury appointed a committee to draft a cryptocurrency bill in India. But the ministry overturned the ban.
- In 2019 – A bill banned the mining, holding, selling, issuing, transferring and using of cryptocurrencies. If they broke the law, people would pay a hefty fine or face up to 10 years in prison.
- March 2020 – The ban was overturned by the Supreme Court of India,
- November 2021 – Finance Minister Nirmala Sitharaman raised the issue of cryptocurrency in the Rajya Sabha. She said the government has not taken any concrete steps to ban cryptocurrency advertising in India, but will raise awareness through the RBI and SEBI.
- Union Budget 2022-23 – The Indian government recognized cryptocurrencies and decided to tax 30% of all virtual assets. She also announced the launch of a central bank digital currency (CBDC) called Digital Rupee.
But is the digital rupee a cryptocurrency? Here’s some context.
What is digital rupee?
The rupee is a currency issued by the RBI and the digital rupee will have the same function, but it will not be a decentralized asset like cryptocurrencies. The digital rupee will be a currency issued by central banks responsible for managing and governing the asset.
The digital rupee will be legal tender, meaning you can use it to buy whatever 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 will be able to use it.
Following the announcement of the digital rupee, India’s Finance Minister Nirmala Sitharaman said, “CBDC would strengthen India’s economy, increase efficiency and reduce the cost of the country’s currency management system, and provide a stable, regulated digital currency that will compete with private cryptocurrencies.”
What is CBDC?
According to RBI, “a CBDC is legal tender issued by a central bank in digital form. It is the same as fiat currency and is one-to-one interchangeable with fiat currency. Only its shape is different.”
But a CBDC cannot be compared to cryptocurrencies.
“Unlike cryptocurrencies, a CBDC is not a commodity or claims to commodities or digital assets. Cryptocurrencies have no issuer. They are not money (let alone currency) in the historical understanding,” the RBI statement said.
The CBDC is the digital avatar of the fiat currency issued by central banks like the RBI and should be exchangeable for cash.
Countries considering CBDC
With the recent popularity of a cashless or digital financial framework, governments and central banks around the world are exploring the possibilities of digital currencies (some of them have also implemented them).
The Bahamas, Nigeria, Dominica, Montserrat, Antigua and Barbuda, Saint Lucia, Saint Kitts and Nevis, Saint Vincent and the Grenadines have already launched their digital currency.
Russia – The digital ruble has completed the first trials – full transaction cycle as announced by the Central Bank of Russia.
China – plans to launch the eCNY or digital yuan by 2022.
Do we need the digital rupee?
The number one reason behind the RBI launching a digital rupee is to push India forward in the virtual currency race. And of course due to the growing importance of cryptocurrency.
- With blockchain technology, the digital rupee will increase efficiency and transparency.
- Blockchain will also enable real-time tracking and ledger maintenance.
- The payment system will be available 24/7 for wholesale and retail customers.
- Indian buyers can pay without intermediaries.
- Lower transaction costs.
- Account statements in real time.
- You do not need to open a bank account to trade with a digital rupee.
- Fast cross-border transactions.
- No volatility risk, like the RBI, will support it.
- Compared to banknotes, the digital rupee will be mobile forever.
But with a gargantuan payment system like UPI, can CBDCs up the game?
According to a survey by RBI, cash remains the preferred form of payment to receive money for regular expenses. Cash is mostly used for low value transactions (amounts up to INR 500).
Does the new 30% tax on cryptocurrencies include digital rupees?
All cryptocurrencies like Bitcoin, Ethereum, Litecoin etc. are not exempt from taxation.
Only the digital rupee of the RBI is exempt from tax regulations.
Read our guide to cryptocurrency taxation in India.
By launching the digital rupee, RBI expects to address issues related to existing physical currencies and cross-border transactions.
Cross-border money transfer and exchanging money in foreign currency is tedious and expensive. With the advent of the digital rupee, instant cross-border money transfer will help make cash management and bank operations more seamless.
In India, placing cash and tracking it is a challenge. CBDC can address and resolve anonymity in a non-intimidating way and reduce the demand for cash. The government will save on operating, printing, distribution and storage costs, thereby strengthening the government’s vision of a cashless economy.