How Is Digital Rupee Different From Cryptocurrency? – Forbes Advisor INDIA

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

Following the digital currency frenzy, between 1983 and 2007, many virtual currencies were launched and disappeared. Because by then, 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 Cash System.

No one knows Satoshi’s true identity.

Who is he or who are they is perhaps a conversation for another day.

Today we will talk about the difference between crypto and digital rupee. And the possibilities brought about by the RBI digital rupee.

What is cryptocurrency?

In simple terms, cryptocurrency is decentralized money, free from the shackles of any government or central bank. It is based on blockchain technology and uses cryptography to protect transactions made by people, making it impossible to falsify them.

However, in August 2010, a hacker found a loophole in the Bitcoin protocol. The hacker took advantage of the vulnerability and created an infinite amount of Bitcoins by making multiple transactions before logging into the blockchain.

The user created 184 billion Bitcoins in a few hours, but his plot was discovered and the transactions 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 any controls that works exactly like traditional currencies.

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

  • Blockchain in cryptocurrency is the showrunner. It is a digital ledger whose access is distributed among authorized users and records transactions.

Information and access are shared among registered users. Therefore, anything 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 like 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).
  • 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. The miners use high-end GPU computers to solve various complex math problems and brain teasers to get cryptocurrency as a reward. It takes days and even months to mine cryptocurrencies.

People can also buy cryptocurrencies from currency owners and exchanges, and can even sell them to other people as well. 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 inventory offline.

Cryptocurrencies can be transacted or transferred using your smartphone, just like a UPI transaction. Users can also convert their cryptocurrency holdings into cash using their bank accounts or P2P transactions.

Of course, although Bitcoin is still the popular choice for miners and investors, it started a digital currency revolution that led to the birth of many popular coins like Ethereum, Tether, XRP, etc.

Cryptocurrencies are immune from any central authority or government interference. However, his relationship with the Indian government has been quite uneasy.

  • april 2018 – People were warned that virtual currencies are not legal tender in India. The Finance Ministry has appointed a committee to frame a cryptocurrency bill in India. But the ministry overturned the ban.
  • in 2019 – A bill prohibited the mining, holding, sale, issuance, transfer and use of cryptocurrencies. If found breaking the law, people would pay a heavy fine or face prison terms 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 issue of cryptocurrencies in the Rajya Sabha. She said that the government had not taken concrete steps to ban cryptocurrency advertisements in India, but will spread awareness through RBI and SEBI.
  • Union Budget 2022-23 – The Indian government recognized cryptocurrencies and decided to tax 30% of any virtual assets. It also announced the launch of a Central Bank Digital Currency (CBDC) called the Digital Rupee.

But is the digital rupee a cryptocurrency? Here’s some context.

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 citizens of India will be able to use it.

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

What is CBDC?

According to the RBI, “a CBDC is legal tender issued by a central bank in digital form. It is the same as fiat currency and can be exchanged one for 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 come to be understood historically”, as stated in the announcement made by RBI.

The CBDC is the digital avatar of paper money issued by central banks like the RBI and should be exchangeable for cash.

Countries considering CBDC

With the recent popularity of a digital or cashless financial framework, governments and central banks around the world are exploring (some of them have also implemented) 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 as announced by the central bank of Russia.

Porcelain – plans to launch the eCNY or digital Yuan by 2022.

Do we need the digital rupee?

The biggest 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 cryptocurrencies.

  • 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 intermediaries.
  • Lower transaction cost.
  • Settlement of accounts in real time.
  • You do not have to open a bank account to transact with a digital rupee.
  • Fast cross-border transactions.
  • No volatility risk such as RBI will support you.
  • Compared to banknotes, the digital rupee will be mobile forever.

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

According to a survey conducted by the RBI, cash is still the preferred mode of payment for receiving money for regular expenses. Cash is predominantly used for small value transactions (amounts up to INR 500).

Does the new 30% tax on cryptocurrencies include the digital rupee?

All cryptocurrencies like Bitcoin, Ethereum, Litecoin, etc. will not be tax exempt.

Only the RBI digital rupee will be free from tax regulations.

Read our guide on How cryptocurrencies are taxed in India.

Bottom line

By introducing the digital rupee, the RBI hopes to address the problems associated with existing physical currencies and cross-border transactions.

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

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