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.
What is Cryptocurrency?
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.
- Blockchain in cryptocurrency is the showrunner. It is a digital ledger whose access is distributed between authorised users and records transactions.
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.
- Decentralisation in cryptocurrency means that the asset is free from governing bodies like central banks. This mechanism makes cryptocurrencies independent. At the same time, the centralised money we use is monitored and managed by the Reserve Bank of India (RBI).
- Cryptography in cryptocurrency means secret writing, which means the recipient can only read messages. It takes care of the transactions, protects operational autonomy, and fortifies 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 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.
- April 2018 – People were warned that virtual currencies are not legal tender in India. The finance ministry appointed a committee to frame a bill for cryptocurrencies in India. But the ministry overruled the ban.
- In 2019 – A bill forbade mining, holding, selling, issuing, transferring and using cryptocurrencies. If found violating the law, people would pay a hefty fine or face imprisonment of up to 10 years.
- March 2020 – The ban was removed by the Supreme Court of India,
- November 2021 – Finance Minister Nirmala Sitharaman raised the topic of cryptocurrency in the Rajya Sabha. She said the government hadn’t taken concrete steps to ban cryptocurrency advertisements in India, but it’ll spread awareness through the RBI and SEBI.
- Union Budget 2022-23 – The government of India recognised cryptocurrencies and decided to tax 30% of any virtual asset. She also announced the launch of a Central Bank Digital Currency (CBDC) called the Digital Rupee.
But is digital rupee cryptocurrency? Here’s some context.
What is Digital Rupee?
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.”
What is CBDC?
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.
Countries that are Considering CBDC
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.
Do we Need the Digital Rupee?
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.
- 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 to wholesale and retail customers 24/7.
- Indian buyers can pay without a middle man.
- Lower transaction cost.
- Real-time account settlements.
- You don’t have to open a bank account to transact with a digital rupee.
- Fast cross-border transactions.
- No risk of volatility, as the RBI, will back it.
- Compared to currency notes, the digital rupee will be mobile forever.
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).
Does the New 30% Tax on Cryptocurrencies Include Digital Rupee?
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.