Before we start, let’s go back to 1983 when David Chaum invented the digital currency called ecash.
Following the hype of digital currencies, between 1983 and 2007, many virtual currencies were launched and disappeared. Because at that time, e-commerce customers were all about credit cards.
Later, decentralized and anonymous money became the basis of Bitcoin. Satoshi Nakamoto introduced cryptocurrency through his white paper – Bitcoin: A Peer-to-Peer Electronic Payment System.
No one knows Satoshi’s true identity.
Who he is or who they are is perhaps a conversation for another day.
Today we are going to talk about the difference between crypto and digital rupee. And the possibilities sparked by RBI’s digital rupee.
What is Cryptocurrency?
Simply put, cryptocurrency is decentralized money, free from government or central bank chains. It relies on blockchain technology and uses cryptography to secure transactions made by people making counterfeiting impossible.
However, in August 2010, a hacker found a flaw in the Bitcoin protocol. The hacker exploited the vulnerability and created an infinite amount of Bitcoins by performing multiple transactions before connecting them to 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 alternative payment system free of control that works exactly like traditional currencies.
To better understand cryptocurrency, you need to know the three terminologies: blockchain, decentralization, and cryptography.
- Blockchain in cryptocurrency is the showrunner. It is a digital register whose access is distributed among authorized users and records transactions.
Information and access are shared between registered users. Thus, everything the blockchain records is transparent and immutable – the information cannot be tampered with or hacked. Not even by the administrator.
- The decentralization of cryptocurrency means that the asset is free from governing bodies such as central banks. This mechanism makes cryptocurrencies independent. At the same time, the centralized money we use is controlled and managed by the Reserve Bank of India (RBI).
- Cryptography in cryptocurrency means secret writing, which means the recipient can only read the messages. It supports transactions, protects operational autonomy and strengthens the entire chain.
How does cryptocurrency work?
All cryptocurrencies are generated through a rigorous process called mining. Miners use computers with high-end GPUs to solve various complex math problems and puzzles to earn cryptocurrencies as rewards. It takes days or even months to mine crypto.
People can also buy cryptocurrencies from currency owners and exchanges, and they can even sell them to other people. Cryptocurrencies are stored in digital wallets, which are hot or cold. A hot wallet is connected to the Internet. In contrast, cold storage keeps your assets offline.
Cryptocurrencies can be processed or transferred using your smartphone, just like a UPI transaction. Users can also convert their crypto holdings into cash using their bank accounts or P2P transactions.
Of course, while Bitcoin remains the popular choice for miners and investors alike, it started a digital currency revolution that led to the birth of many popular currencies like Ethereum, Tether, XRP, etc.
Cryptocurrencies are immune to interference from central authority or government. However, their relationship with the Indian government has been quite uncomfortable.
- April 2018 – People have been warned that virtual currencies are not legal tender in India. The Ministry of Finance has appointed a committee to draft a cryptocurrency bill in India. But the ministry rescinded the ban.
- In 2019 – A bill prohibited the mining, possession, sale, issuance, transfer and use of cryptocurrencies. If they broke the law, people would pay a hefty fine or face jail time of up to 10 years.
- March 2020 – The ban was lifted 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 has not taken concrete steps to ban cryptocurrency advertisements in India but will raise awareness through the RBI and SEBI.
- Union Budget 2022-23 – The Indian government has recognized cryptocurrencies and decided to tax 30% of any virtual asset. She also announced the launch of a central bank digital currency (CBDC) called Digital Rupee.
But is the digital rupee a cryptocurrency? Here is some context.
What is the digital rupee?
Rupee is a currency issued by the RBI and 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 governing and managing the asset.
The digital rupee will be legal tender, which means 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 Indian citizens 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 reduce expense in the country’s currency management system, and provide stable and regulated digital currency that will compete with private cryptocurrencies. .”
What is the CBDC?
According to the RBI, “A CBDC is legal tender currency issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable on a one-to-one basis 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 on commodities or digital assets. Cryptocurrencies do not have an issuer. They are not money (certainly not currency) as the word has been understood historically,” as stated in the announcement made by RBI.
CBDC is the digital avatar of paper currency issued by central banks like RBI and is expected to be redeemable for cash.
Countries Considering CBDC
With the recent popularity of a cashless or digital financial framework, global governments and central banks are exploring (some of them also implementing) the possibilities of digital currency.
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 initial tests – full cycle of transactions 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 advance India 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.
- The 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 intermediaries.
- Reduced transaction cost.
- Real-time account settlements.
- You do not need to open a bank account to transact 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 giant payment system like UPI, can CBDCs improve the game?
According to an RBI survey, cash remains the preferred mode of payment for receiving money for regular expenses. Cash is mainly used for small value transactions (amounts up to INR 500).
Does the new 30% tax on cryptocurrencies include the digital rupee?
All cryptocurrencies such as Bitcoin, Ethereum, Litecoin, etc. will not be exempt from tax.
Only RBI’s digital rupee will be exempt from tax regulation.
Read our guide to cryptocurrency taxation in India.
By introducing the digital rupee, the RBI hopes to address issues associated with existing physical currencies and cross-border transactions.
Cross-border money transfer and converting money into foreign currency is cumbersome and expensive. With the launch of the digital rupee, instant cross-border money transfer is expected to make cash management and banking more seamless.
In India, placing money and tracking it is a challenge. The CBDC can fight anonymity and solve it in a non-intimidating way and reduce the demand for money. The government will save on operating, printing, distribution and storage costs, furthering the government’s vision towards a cashless economy.