The Reserve Bank of India (RBI) released a concept note on its digital currency last month. This makes the RBI one of many central banks (over 60 at last count).
The Reserve Bank of India (RBI) released a concept note on its digital currency last month.
(And Sreedharan) The Reserve Bank of India (RBI) released a concept note on its digital currency last month. This makes the RBI one of many central banks (over 60 as of late) to work on their own Central Bank Digital Currency (CBDC) in response to the highly questionable and volatile cryptocurrency. What are central banks thinking about their CBDC? The answer is clear. The popularity of cryptocurrencies has them worried. There are currently more than 20,000 cryptocurrencies in circulation with a global capitalization of around $900 billion (despite their steep price decline – on November 9, 2021, Bitcoin alone had a market capitalization of $1.28 trillion).
I’m in the camp that believes cryptocurrencies have no real value (hence the aptly nicknamed ‘shitcoins’ that can cause market turmoil), but the blockchain technology behind them is quite effective. Today anyone with a powerful computer can start ‘mining’ their own cryptocurrency. It’s like anyone printing their own notes with a good printing press.
It is the disciplined but always fragile monetary system that is the type of disruption in financial markets that central banks fear most. This is why most central banks have not legalized crypto. In fact, many have even banned them. But central banks are seeing the benefits of electronic currency. They are thinking of giving users all the benefits without the risks associated with cryptocurrency. (I think there are other reasons as well, such as significant savings in cash handling costs, but that’s not the only major reason behind the idea of introducing digital currency.)
E-Rupee vs Crypto
Before knowing what e-rupee is and how it works, let’s first summarize the difference between e-rupee and cryptocurrency:
• Unlike Bitcoin, e-Rupee will be a fiat currency, backed by an issuing authority. Whereas there is no issuing authority behind Bitcoin.
• The e-rupee will have the same value as the traditional rupee and will have exchangeability, so it will not be as volatile as crypto.
• E-Rupee will not require a distributed public ledger (ledger) like crypto, as the central bank will do the record keeping. However, it can use some features of blockchain technology like smart tokens to eliminate intermediary banks.
• Like crypto, e-rupees will speed up transactions and reduce or reduce transaction costs. As with crypto, in the case of token-based eRupee, the account holder will own it.
How does CBD work?
Now if you are wondering what is the difference between e-rupee and digital banking, then the answer is that e-rupee will be the liability of the central bank (reserve bank), which would be shown in its books of account. In contrast, the digital money in your commercial bank account is the bank’s liability and it alone maintains the transaction record. Apart from this, bank deposits give you interest income, but holding interest payments with e-rupee has both advantages and disadvantages. Reason: To prevent CBDCs from competing with bank deposits. Whatever the RBI ultimately decides, it is certain that the e-rupee will co-exist with the traditional rupee.
Like RBI notes, CBDC will have two different users: first, retail (people like you and me) and second, wholesale i.e. banks. Banks will use CBDC in transactions with other banks. You and I will use the token-based version of this for regular transactions.
Will CBDC Kill Crypto?
Crypto hoarders are keeping a close eye on CBDC. They do not like the idea of central bank intervention in their area. Eventually, Bitcoin emerged with the aim of eliminating the monetary rupee. It was like a revolt against a country’s currency. Proponents of Bitcoin question why the power to issue, increase, or decrease the value of a currency should rest solely with that country. ? As a concept, it is very good but it is not free from unknown dangers. The years of turmoil in the crypto market have also proved this.
Central banks are confident that CBDC will end crypto. In fact, RBI Deputy Governor T. Ravi Shankar went on the record in detail at an IMF webinar in June this year. He said that most cryptocurrencies have absolutely zero value, they are priced at imaginary levels. Bank for International Settlements (BIS) officials have also said that crypto will have no future after the arrival of CBDC.
Nevertheless, we shouldn’t expect too much from CBDC for now. No one knows what impact CBDC will have on the currency system and whether retail customers will accept it. However, one thing is clear. Ever since the existence of e-money from central banks, the future of crypto-currencies will always hang in the balance.
(And Sreedharan is the managing editor of Focus News Kannada, who views crypto with skepticism.)
(Disclaimer: The views expressed in this article are the author’s own. The views and information in this article do not represent the views of News9.)