Central Bank Digital Currency

WHAT IS CENTRAL BANK DIGITAL CURRENCY?

Updates and questions on development of digital rupee always accompany news of a possible crypto-ban in India.

Are the two comparable?

Only to the extent of being virtual.

The major difference between a central bank digital currency and cryptocurrency is sovereign backing. A currency note has a message from the RBI Governor printed on it, “I promise to pay…”. This promise will hold good for the digital rupee.

Cryptocurrency lies outside the purview of RBI and the legal system, so any disputes regarding transactions will not be solved by litigation in courts.

Cryptocurrency is treated as an asset class for investment. A digital rupee will only be a mode of transaction, not an asset.

A digital rupee is the digital equivalent of a regular rupee, with the same value, validity and purchasing power. It exists as a parallel system, not a competitor to fiat currency.

What is Digital Rupee?

The pre-launch curiosity reminds me of demat accounts being launched in 1997. Shareholders asked if it is possible to re-convert the shares to a physical form.  Somehow, they were not comfortable with the idea of wealth in the form of physical shares, getting transformed to entries in a depository statement. The option of re-materialisation is available, but usage extremely rare in the last 24 years.

The same logic applies to digital gold not being a highly popular asset today.

However, the world has changed meanwhile. People are now used to digital money in the form of digital wallets, UPI, net-banking, electronic funds transfer and payment apps. 

The introduction of E-rupi eliminated the middleman completely. E-Rupi is a voucher based on SMS-string or QR code used for disbursement of welfare scheme benefits. The technology is not based on blockchain, and the purpose is different from that of cryptocurrency.

DIFFERENCE BETWEEN CBDC AND EXISTING WALLETS/APPS

1. Banking Intervention

All the options that we use at present like wallets, apps or UPI are funded by a bank account.

The Digital Rupee, once purchased will bypass the banking system totally.

Funds transfer will be peer-to-peer, immediate and final with no time spent on inter-bank settlements.

Cross-border settlements can be much faster, with a huge saving in costs.

The business impact it is likely to have on the banking system is a question to be dealt with separately.

2. Accountability

Cash has anonymity, which will disappear completely.

The source of money can be tracked from the flow, and the owner held liable to taxation and other extant laws.

HOW TO BUY CENTRAL BANK DIGITAL CURRENCY?

CBDC is based on the distributed ledger technology, and can be issued in the form of tokens or digital wallets.

One can use fiat currency (physical rupee) to buy CBDC, and both forms remain interchangeable.

WHY DO GOVERNMENTS NOT SUPPORT CRYPTOCURRENCY?

It is a fear of loss of control.

They fear a flight of national wealth to international avenues which cannot be tracked. It will affect Gross Domestic Product (GDP) computation.

Every government is developing a stable coin or a digital currency of its own, to compete with crypto as a mode of remittance. 

WILL INVESTORS STILL FLOCK TO CRYPTO AS AN ASSET CLASS?

Yes. The investors with a high risk appetite and a hunger for quick and high returns will flock to it.

In case the much-feared crypto ban happens in India, the business will move to the deep or dark web and underbelly of financial activity.

The legal problems that exist today are

1. There is no clarity if cryptocurrency is to be treated as an investment asset, a currency,  a commodity or a service which an exchange provides.

2. The logic to be applied to taxation raises question marks, like what GST rate should be applied. Calculation of long-term or short-term capital gains is not easy, as it needs a First-In First Out or Last-in-First-Out rule.

Find details on this ETNow video.

The indicators are not encouraging. State Bank of India has banned all transactions with cryptocurrency exchanges. The Cryptocurrency Bill is likely to be tabled in the winter session. All discussions are only a speculation till then.

Find latest news updates on cryptocurrency here.

DOES RBI HAVE A PLATFORM FOR TRADING IN ASSETS?

Reserve Bank of India will shortly come out with Retail Direct – online platform for investment in G-Secs, Sovereign Gold Bonds, Treasury Bills and State Development Loans. It will allow a retail investor to participate in the bidding process and sale/purchase in secondary market, without the intervention of an intermediary.

All the above instruments being backed by the government, guarantee safety of the investor’s money.

However, selling and buying in the secondary market is similar to trading in shares, subject to prevailing prices on that particular day. Transactions will be carried out on the NDS-OM platform of RBI.

How to buy G-secs on RBI Retail Direct

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