What is CBDC? How is it different from Cryptocurrency?

Before we start discussing about CBDC and Cryptocurrency, let us know a bit about Digital currency first.

Definition of a Digital Currency?

Digital currency is a form of currency that is available only in digital or electronic form. It is also called digital money, electronic money, electronic currency, or cybercash. Majorly, there are three types of digital currencies available:

1. Cryptocurrency
2. Central Bank Digital Currency (CBDC)
3. Virtual Currency

Central Bank Digital Currency (CBDC)

A CBDC can be a supplement or a replacement to traditional fiat currency. In contrast to fiat currency, which is available in both physical and digital forms, a CBDC is only available in digital form.

The Finance Minister announced the launch of India’s Central Bank Digital Currency (CBDC) in the Budget for 2022-23, claiming that the digital rupee will provide the digital sector a “huge boost.”

Starting in 2022-23, the Reserve Bank of India would issue the currency using technology such as blockchain, according to the Finance Minister.

The Reserve Bank had, in July 2021, indicated that it would soon begin work on the ‘phased implementation’ of the CBDC.

Key Points about RBI’s CBDC

• The CBDC will be kept in a central bank-supervised digital wallet. The Reserve Bank of India (RBI) will oversee the digital rupee in India, while it may delegate certain authority to banks.
• The Reserve Bank of India is likely to take steps to promote the usage of its digital currency over actual cash.
• It is important to emphasise that the RBI’s digital rupee will not directly replace bank demand deposits.
• Banks will continue to use physical currency, and consumers who want to withdraw cash from banks will be able to do so. However, individuals have the option of converting their bank deposits into the new digital rupee.

What is Cryptocurrency?

Cryptocurrencies are considered virtual currencies because they are unregulated and exist only in digital form. Cryptography is also used to manage and control the creation of such currencies. It runs on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders. Cryptos are a string of numbers in a computer programme. Currently, there are a total of 21 million cyptos and requires increasing amounts of computer power and energy (called mining, like for gold). Bitcoin’s price has risen in tandem with the cost of producing it.

What is the difference between CBDC and Cryptocurrency?

• Centralisation: The most significant distinction between digital currency and cryptocurrency is who controls the monetary worth of your coins. In the event of digital money, the Reserve Bank of India or the determine the currency’s value. On the other hand, the value of cryptocurrency is independent of central banking authorities.
• Stability: Digital currency, being the fiat version of approved currency, is traded and understood by a vast majority of the population. On the other hand, cryptocurrency’s price fluctuates because it is influenced by supply and demand, investor and user sentiments, government regulations, and media hype. All of these factors work together to create price volatility.
• Transparency: With digital currency, only the banking authorities along with the sender and receiver are involved in the transaction involved. Whereas, Every detail regarding cryptocurrency transactions is in the public domain thanks to the presence of a decentralised ledger that records all the blockchain details.
• Encryption: Digital currencies are essentially e-cash that does not require any specific encryption technologies. Cryptocurrencies, on the other hand, are stored on a blockchain, and the coins themselves are kept in ‘wallets,’ which provide greater cyber security.

Benefits of issuing CBDC:

• The cost of producing digital currencies, according to central banks, is significantly lower than the cost of printing and distributing actual cash.
• Another rationale for the introduction of digital cash could be to reduce the use of paper money.
• The RBI will be able to manufacture and distribute it at essentially no cost because the digital rupee would be created and distributed electronically.
• Unlike actual cash, which is difficult to track, a digital currency controlled by the RBI can be tracked and regulated more easily. Thus, it can improve monetary policy development in India.
• One of the key drivers of the shift to private digital currencies has been the desire for anonymity.
• A CBDC can definitely increase the transmission of money from central banks to commercial banks and end customers much faster than the present system. “Specific use cases, like financial inclusion, can also be covered by CBDC that can benefit millions of citizens who need money and are currently unbanked or banked with limited banking services
• CBDC could allow governments to effectively tackle illegal activities, such as payment fraud, giving people a greater sense of security with their money.

What are the risks associated with the adoption of Digital Currency?

Many people, including central bankers, are concerned that as digital currencies created by central banks become more popular, people may begin withdrawing money from their bank accounts.

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