Before we begin, let’s go back to 1983 when David Chaum invented the digital currency called ecash.
Following the hype of digital currency, between 1983 and 2007, many virtual currencies were launched and disappeared. Because eCommerce customers were now addicted to credit cards.
Subsequently, decentralized and anonymous money became the basis for Bitcoin. Satoshi Nakamoto introduced cryptocurrency through his white paper: Bitcoin: A Peer-to-Peer Electronic Money System.
Nobody knows Satoshi’s true identity.
Who is or who I am maybe is a conversation for another day.
Today we will talk about the difference between cryptocurrency and digital rupee. And the possibilities aroused by RBI’s digital rupee.
What is cryptocurrency?
Put simply, cryptocurrency is decentralized money, free from any government or chain of central banks. It is based on blockchain technology and uses cryptography to protect transactions made by people by 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 making multiple transactions before registering them in the blockchain.
The user created 184 billion Bitcoins in 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 from any control that works exactly 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 whose access is distributed among authorized users and records transactions.
Information and access are shared between registered users. So, everything the blockchain records is transparent and immutable: the information cannot be tampered with or hacked. Not even by the administrator.
- Decentralization in 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 monitored and managed by the Reserve Bank of India (RBI).
- Cryptocurrency encryption means secret writing, which means the recipient can only read the messages. It deals with transactions, protects operational autonomy and strengthens the entire supply chain.
How does cryptocurrency work?
All cryptocurrencies are generated through a rigorous process called mining. Miners use high-end GPU computers to solve various complex math problems and puzzles to get cryptocurrencies as a reward. It takes days and even months to mine cryptocurrencies.
People can also buy cryptocurrencies from currency owners and exchange platforms and can even sell them to other individuals. Cryptocurrencies are stored in digital wallets, which are hot or cold. A hot wallet is connected to the internet. Conversely, cold rooms keep your businesses offline.
Cryptocurrencies can be exchanged or transferred using your smartphone, just like a UPI transaction. Users can also convert their cryptocurrencies into cash using their bank accounts or P2P transactions.
Of course, while Bitcoin remains the popular choice for miners and investors, it has initiated a digital currency revolution which has led to the emergence of many popular currencies such as Ethereum, Tether, XRP etc.
Cryptocurrencies are immune from any central authority or government interference. However, their relationship with the Indian government was rather uncomfortable.
- April 2018 – People have been warned that virtual currencies are not legal tender in India. The finance ministry has appointed a committee to draft a bill for cryptocurrencies in India. But the ministry overturned the ban.
- In 2019 – A bill prohibited the extraction, holding, sale, issue, transfer and use of cryptocurrencies. If found violating the law, people would pay a hefty fine or risk imprisonment for up to 10 years.
- March 2020 – The ban was lifted by the Supreme Court of India,
- November 2021 – Finance Minister Nirmala Sitharaman raised the issue of cryptocurrency in Rajya Sabha. He said the government has not taken concrete steps to ban cryptocurrency advertising in India, but will spread awareness through the RBI and SEBI.
- Budget of the Union 2022-23 – The Indian government has recognized cryptocurrencies and has decided to tax 30% of any virtual asset. It also announced the launch of a Central Bank Digital Currency (CBDC) called Digital Rupee.
But is the digital rupee cryptocurrency? Here’s some background.
What is the 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 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.
Following the announcement of the digital rupee, Indian Finance Minister Nirmala Sitharaman said: “CBDC would strengthen India’s economy, increase efficiency and reduce the expense of the country’s currency management system and provide a stable digital currency. and regulated 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 digital form. It is the same as a fiat currency and is exchangeable one-to-one 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 have no issuer. They are not money (certainly not currency) as the word has been historically understood ”, as stated in the announcement made by RBI.
CBDC is the digital avatar of paper currency issued by central banks such as RBI and should be exchangeable for cash.
Countries considering CBDC
With the recent popularity of a cashless or digital financial framework, world governments and central banks are exploring (some of them have even implemented) the possibilities of digital currency.
Bahamas, Nigeria, Dominica, Montserrat, Antigua and Barbuda, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines have already launched their digital currency.
Russia – the Digital Ruble has completed initial trials, the full cycle of transactions as announced by the Russian central bank.
China – plans to launch the eCNY or digital Yuan by 2022.
Do we need the digital rupee?
The most important reason for the RBI to launch a digital rupee is to push India forward in the race for virtual currency. And, of course, for the growing importance of cryptocurrency.
- With blockchain technology, the digital rupee will increase efficiency and transparency.
- Blockchain will also allow for real-time monitoring and record maintenance.
- The payment system will be available to wholesale and retail customers 24/7.
- Indian buyers can pay without an intermediary.
- Lower transaction costs.
- Account adjustments in real time.
- It is not necessary 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 out there, can CBDCs make the game better?
According to an RBI survey, cash remains the preferred payment method for receiving money for regular expenses. Cash is mainly used for small value transactions (amount up to INR 500).
Does the new 30% cryptocurrency tax include the digital rupee?
All cryptocurrencies such as Bitcoin, Ethereum, Litecoin etc., will not be exempt from taxation.
Only RBI’s digital rupee will be exempt from tax regulations.
Read our guide on How Cryptocurrencies Are Taxed in India.
With the introduction of the digital rupee, the RBI plans to address the problems associated with existing physical currencies and cross-border transactions.
Cross-border money transfer and foreign currency conversion is tedious and expensive. With the launch of the digital rupee, instant cross-border money transfer will make bank cash handling and operations smoother.
In India, cash placement and cash tracking is a challenge. CBDC can deal with anonymity and resolve it in a non-intimidating way and reduce the demand for cash. The government will save on operating, printing, distribution and archiving costs by strengthening the government’s vision for a cashless economy.