Did you know that over 80 countries are now exploring the possibility of creating their own centralised digital money? That number represents over 90 per cent of the world’s gross domestic product (GDP) or the total monetary value of final goods and services.
Because of the rising rate of cryptocurrency adoption worldwide, many countries like India have started to test the waters of digital currency by launching their own Central Bank Digital Currency (CBDC). But what is a CBDC and how does it work? More importantly, how will India’s CDBC differ from other cryptocurrencies like Bitcoin (BTC)?
What is a CBDC?
A Central Bank Digital Currency (CBDC) is a legal tender in a digital form that is issued by a central bank. It works just like traditional money, but it’s digital. All fiat money like paper bills and coins, as well as checks, securities, and bonds can be considered and treated as CBDC.
Supposedly, you can use a CBDC to pay for goods and services and make other monetary transactions. The only different thing is its form. Simply put, it’s like holding 100 USD worth of physical cash, but in your digital wallet that’s installed on your smartphone. If you think about it, CBDCs are pretty similar to cryptocurrencies like Bitcoin: both require a digital wallet to securely store, easily manage, and conveniently use funds.
However, it’s important to note that each of these digital currencies has distinct characteristics that make them different from one another — we’ll talk more about this later. But before we dive deeper into that, let’s first take a quick look at the possible reasons behind India’s very own digital currency.
Why would the RBI launch its own digital currency?
India is known as one of the leading countries in terms of digital payments innovations. The country facilitates payments that can be processed instantly almost anytime with minimal fees. This is probably why many multinational companies operating in India are now accepting digital currency payments.
According to the website of the Reserve Bank of India (RBI), here are the reasons behind the adoption of CBDC:
1 Central banks, faced with dwindling usage of paper currency, seek to popularise a more acceptable electronic form of currency (like Sweden)
2 Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan, or even the US)
3 Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.
Some reports said that by launching a CBDC, the country could reduce the economy’s reliance on cash. This will then enable cheaper, faster, and more convenient international payments and transactions. Additionally, it is believed to potentially promote more real-time and cost-effective globalisation of payment systems. It was also mentioned that CBDC could help protect the people from the volatility of private cryptocurrencies, such as Bitcoin.
Apart from building a cashless economy, CBDC is also considered an instrument in promoting financial inclusivity and modernizing the current banking sector of India.
The difference between India’s CBDC and Bitcoin
While both the Central Bank Digital Currency and Bitcoin work solely through technology, each has its own unique characteristics that make it different from one another. Let’s begin with Bitcoin’s decentralised nature.
BTC is a cryptocurrency that isn’t governed by any central authority — neither by central banks and other financial institutions nor by its mysterious developer who lurks behind the name of Satoshi Nakamoto.
On the other hand, India’s CBDCs are governed and distributed by the RBI. This means that transactions and issuance of this currency will run through the government’s review and approval. The limits and distribution of CBDCs will also depend on the RBI. This governing body will be in charge of producing new digital coins should there be a need to release more.
Additionally, Bitcoin has a maximum supply of 21 million BTC set by its pseudonymous creator. Since BTC has no central authority, no one can change its maximum count—unless the protocol will be altered, which is highly unlikely. CBDC, on the other hand, promises less volatility and greater security, something that cannot be controlled with a highly volatile asset like Bitcoin.
Bitcoin also serves as an asset or a commodity that can be bought and sold on cryptocurrency exchanges or marketplaces such as Paxful. A CBDC, in contrast, is a digital legal tender and the only way to get it is through central banks.
While both the CBDC and Bitcoin work pretty much the same today, we’ve learned that each still offers its own unique potential. So, is India’s own digital currency really far from the uniqueness of BTC and the wonders it can offer? More importantly, will the launch of CBDC help in further empowering the digital economy of India? Let us know your thoughts!
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