RBI Digital Currency: An Alternate To Cryptocurrency Investment Or A Substitute Of Paper Currency?

Cryptocurrency is a digital payment mechanism that does not rely on banks for transaction verification. It\’s a peer-to-peer payment system that allows anybody, anywhere to send and receive money. Cryptocurrency payments exist solely as digital entries to an online database identifying specific transactions, rather than as tangible money carried around and exchanged in the real world. Transactions involving Bitcoin funds are recorded in a public ledger. Digital wallets are where cryptocurrency is kept.

The term \”cryptocurrency\” refers to the use of encryption to verify transactions. This implies that complex coding is used to store and send Bitcoin data between wallets and to public ledgers. Encryption\’s goal is to ensure security and safety.

Blockchain technology is the foundation for cryptocurrencies such as Bitcoin. It is a digital and decentralized ledger that securely and efficiently records payment and transfer transactions. It\’s also a significant reason why huge firms are ecstatic. It is rigid and cannot be changed once a block of data has been created which ensures safety of the data.

Some Interesting facts and figures about cryptocurrencies:

• There are around 9,500 cryptocurrencies in circulation
• The total amount of Bitcoins is limited (19 million)
• Pizza was the first commercial Bitcoin transaction
• Most consumers still have little understanding of what cryptocurrencies are or if they are legal.
• Cryptocurrencies have no fundamental backing
• It is not regulated by any authority (Decentralized)
• Cryptocurrencies are banned in a number of countries
• Digital currencies are exceptionally volatile
• The world invested $3 billion in crypto-currency in year 2020-21 (till December 15)
• The total market cap of cryptocurrency crossed $3 trillion in 2021
• The highest number of crypto owners (10.07 crore) belong to India
• As per Jan 1, 2022 more than 20 million Indians hold around $5.3 billion of crypto assets

Let’s have a look at the Cryptocurrency market around the world:

Cryptocurrencies such as Bitcoin does not have any physical appearance but it has disrupted the entire financial world.

The cryptocurrency market has seen many ups and downs in the past years especially during the pandemic period. The investors have made fortunes and have also lost all of their savings in this extremely volatile market.

People around the world share diverse opinions on this class of asset. Countries like Turkey, Russia, and even China who has recently banned cryptocurrency have a negative view whereas countries like Malta, USA, Singapore and Switzerland have a positive outlook on cryptocurrency. A small country named EL Salvador has adopted cryptocurrency as a legal tender for their currency. Also last year, Elon Musk the CEO of Tesla announced that it will accept Bitcoin as a payment method at Tesla which soared the prices of Bitcoin and changed many peoples outlook on cryptocurrencies. Later, he cited that Tesla will stop accepting Bitcoin as payment method due to environment concerns due to which there was a huge fall in the overall cryptocurrency market.

India’s stance on Cryptocurrency:

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December 2013	The Reserve Bank of India (RBI) issued a circular warning the public against the use of virtual currencies
February 2017	Banks continued to accept cryptocurrency exchange transactions due to which the RBI issued another circular underlining its worries about virtual currency
December 2017	The RBI and the finance ministry had issued a warning; stressing those virtual currencies are not legal money. There was no cryptocurrency restriction at the time, and most banks accepted transactions from Bitcoin exchanges.
March 2018	The Central Board of Digital Tax (CBDT) submitted a draft scheme to the finance ministry for banning virtual currencies.
April 2018	RBI issued a circular asking commercial and co-operative banks, payments banks, small finance banks, NBFCs, and payment system providers from dealing in virtual currencies, or providing services to all entities which deal with crypto exchanges. Cryptocurrency prices fell, exchanges froze, and withdrawals stopped once that order was passed.
April 2018	The finance ministry appointed-committee proposed a draft bill for the regulation of virtual currencies but did not recommend a ban.
February 2019	The committee proposed a fresh draft bill that recommended a blanket ban on digital currencies.
March 2020	The Supreme Court of India lifted the curb on cryptocurrency imposed by RBI, which restricted banks and financial institutions from providing access to banking services to those engaged in transactions in crypto asset.
February 2021	A high-level Inter-Ministerial Committee (IMC) constituted under the Chairmanship of Secretary (Economic Affairs) to study the issues related to virtual currencies and propose specific actions to be taken in the matter recommended in its report that all private cryptocurrencies, except any virtual currencies issued by the state, will be prohibited in India
November 2021	The Standing Committee on Finance, chaired by BJP member Jayant Sinha, met representatives of crypto exchanges, Blockchain and Crypto Assets Council (BACC), among others, and came to the conclusion that cryptocurrencies should not be banned, but regulated.
February 2022	According to budget 2022, income generated from Virtual Digital Assets will be taxed at 30% from April 1, 2022.
February 2022	RBI to issue its own digital currency using blockchain technology.

Until recently, India\’s stance on cryptocurrencies has been uncertain. This asset class has seen significant changes in the country, first with a warning, then a prohibition, and finally a regulation.

But after budget 2022 things have changed. The government has shown clear intent to not ban cryptocurrency but at the same time taxing it at higher rates to discourage people in the country from investing in it.

The government’s clear aim is to encourage people towards its own digital currency which is to be launched by RBI till the end of 2023.

What is a digital currency?

A Central Bank Digital Currency (CBDC) is a digital representation of legal tender issued by the central bank. It is comparable to fiat currency and may be traded one for one, but in a different form. A sovereign currency in electronic form will be recorded as a liability on the central bank\’s balance sheet (currency in circulation). CBDCs should be able to be exchanged for cash. Central banks throughout the globe are pushing digital currencies for a variety of reasons, including popularizing the use of electronic money and preventing the creation of private digital assets such as cryptocurrencies. More than 91 nations, accounting for more than 90% of the world\’s GDP, are developing their own centralized digital currency.

India\’s digital currency is in the early stages of development and is likely to be launched by the end of 2023.

Characteristics of Central Bank Digital Currency (CBDC):

• CBDCs, like paper currency, are direct liabilities of the central bank, making them a safer form of digital money. This is analogous to the situation in which everyone has a checking account with the central bank.
• Paper cash will be rendered obsolete because the central bank will be the custodian of everyone\’s cash and the clearer of all transactions, and there will be no need for conversion of paper money into digital money because a CBDC unit is a direct central bank liability that is precisely equivalent to paper money rather than merely convertible into it, rendering paper cash obsolete.
• Easier policy implementation and regulation: All transactions in a CBDC ecosystem may potentially be monitored using data analytics and AI to swiftly identify banks that are failing or engaged in problematic activities. In a CBDC world where digital bank codes are accessible to the clearing institution, authorities can identify the participants to a transaction much more easily, which greatly simplifies the discovery of criminal behavior and eliminates black markets that deal primarily in physical money.

Benefits of digital currency for the government and economy:

• Faced with diminishing paper money usage, central banks attempt to popularize a more acceptable electronic form of cash will help in reduction of usage of paper for currency printing.
• Jurisdictions with a high reliance on physical cash and a need to improve issuance efficiency.
• Central banks strive to accommodate the public\’s need for digital currencies, as seen by the growing usage of private virtual currencies, while avoiding the more negative implications of such private currencies.
• CBDC payments are final, reducing settlement risk in the financial system. CBDC will do away with the requirement for interbank settlement. It is similar to a UPI system in that CBDC is transacted instead of bank balances, as though cash is being handed over.
• CBDCs might also enable more real-time and cost-effective payment system internationalization. It is possible for an Indian importer to pay its American exporter in digital Dollars in real time, without the need for a middleman. This transaction would be final, as if cash dollars are handed over, and would not even require that the US Federal Reserve system is open for settlement. Currency settlements would no longer be affected by time zone differences.
• In compared to other kinds of money, the CBDC can provide users with features like as liquidity, scalability, acceptability, convenience of transactions with anonymity, and speedier settlement. CBDC adoption will enhance and make it easier for individuals to utilize with the government\’s supporting infrastructure. The advancement will make digital currencies more accessible to the general public, just as UPI made digital cash more convenient to use.

Conclusion:

The RBI digital currency has the potential to overcome a lot of challenges faced by the paper/ fiat currency. Also, as mentioned above there are many Indian people who like to hold digital assets and with growing popularity of digital currencies the number is going to rise up more in the coming years. The government’s aim is to ensure that the money of Indian investors is safe in digital assets which is one of the major reasons behind RBI’s launch of digital currency.

To sum it all, The RBI digital currency is not an alternate to cryptocurrency investment in which the main aim of investors is to earn higher returns in shorter period but it is a safer form of holding a digital asset for investors and probably the best substitute of paper-based currency.