How is digital rupee different from cryptocurrency? – Forbes INDIA Advisor


Before we begin, let’s go back to 1983 when David Chaum invented the digital currency called ecash.

After the digital currency frenzy, between 1983 and 2007, many virtual currencies were launched and disappeared. Because until then, e-commerce customers were devoted to credit cards.

Decentralized and anonymous money later became the foundation of Bitcoin. Satoshi Nakamoto introduced cryptocurrency through his white paper, Bitcoin: A Peer-to-Peer Electronic Money System.

No one 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 digital rupee. And the opportunities brought about by RBI’s digital rupee.

What is cryptocurrency?

In simple terms, cryptocurrency is decentralized money, free from the chains of a government or central bank. It relies on blockchain technology and uses cryptography to protect transactions made by people, making it impossible to forge.

However, in August 2010, a hacker discovered a loophole in the Bitcoin protocol. The hacker took advantage of the vulnerability and created an infinite amount of bitcoins by performing multiple transactions before registering them on the blockchain.

The user created 184 billion bitcoins in a few hours, but his plot was discovered and the transactions were cancelled. To date, this is the only threat to the Bitcoin network.

The purpose behind the creation of Bitcoin is to help people send money over the Internet. It is a digital currency, an alternative payment system free from any control that works just like traditional currencies.

To better understand cryptocurrency, you need to know about the three terminologies: blockchain, decentralization and cryptography.

  • Blockchain in cryptocurrency is the leader. 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 from the admin.

  • 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 overseen and managed by the Reserve Bank of India (RBI).
  • Cryptography in cryptocurrency means secret writing, which means that the recipient can only read messages. It takes care of 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 get cryptocurrencies as a reward. Mining crypto takes days and even months.

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 that are either hot or cold. A hot wallet is connected to the internet. In contrast, cold storage keeps your farms 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 really started 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 is rather uneasy.

  • 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 cryptocurrency bill in India. But the ministry lifted the ban.
  • In 2019 – Bill prohibits mining, holding, selling, issuing, transferring and using cryptocurrencies. If found to be breaking the law, people will pay a hefty fine or face up to 10 years in prison.
  • 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 ads in India but will spread awareness through RBI and SEBI.
  • Union Budget 2022-23 – The Government of India has recognized cryptocurrencies and decided to impose a 30% tax on every virtual asset. It also announced the launch of a central bank digital currency (CBDC) called the digital rupee.

But is digital rupee a 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 will not be a decentralized asset like cryptocurrencies. The digital rupee will be a currency issued by central banks responsible for managing and managing 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 RBI starts circulating the digital rupee, all citizens of India can use it.

Following the announcement of the digital rupee, India’s Finance Minister Nirmala Sitharaman said that “CBDC will strengthen India’s economy, increase efficiency and reduce costs of the country’s currency management system and provide a stable, regulated digital currency that will competes with private cryptocurrencies.”

What is CBDC?

According to the RBI, “CBDC is legal tender issued by a central bank in digital form. It is the same as fiat currency and can be exchanged one-to-one with fiat currency. Only its form is different.”

But CBDC cannot be compared to cryptocurrencies.

“Unlike cryptocurrencies, CBDC is not a commodity or claims on commodities or digital assets. Cryptocurrencies have no issuer. It is not money (certainly not currency) as the word was historically understood,” as the announcement made by the RBI said.

CBDC is the digital avatar of paper currency issued by central banks like RBI and should be exchangeable with cash.

Countries considering CBDC

With the recent popularity of a cashless or digital financial framework, the world’s 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, 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 – a full cycle of transactions, as announced by Russia’s central bank.

China – plans to launch eCNY or digital yuan by 2022.

Do we need the digital rupee?

The most important reason behind the launch of digital rupee by RBI is to push India ahead in the virtual currency race. And, of course, because of 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 middleman.
  • Lower transaction costs.
  • Real-time bill payments.
  • You don’t need to open a bank account to transact with digital rupee.
  • Fast cross-border transactions.
  • There is no risk of volatility as RBI will not support it.
  • Compared to banknotes, the digital rupee will be mobile forever.

But with a huge payment system like UPI around, can CBDCs up the game?

According to an RBI survey, cash remains the preferred mode of payment for receiving money for regular expenses. Cash is mostly used 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. will not be tax exempt.

Only RBI’s digital rupee will be free from tax regulations.

Read our guide on how cryptocurrencies are taxed in India.

Bottom row

With the introduction of the digital rupee, the RBI expects to address issues related to existing physical currencies and cross-border transactions.

Cross-border money transfer and converting money into foreign currency is tedious and expensive. With the launch of the digital rupee, instant cross-border money transfer is set to make cash management and bank operations more seamless.

In India, placing cash and tracking it is a challenge. CBDC can address anonymity and resolve it in a non-intimidating manner and reduce the demand for cash. The government will save operational costs, printing, distribution and storage costs – furthering the government’s vision for a cashless economy.

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