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What’s happening?
- The government is preparing to introduce a law to ban private cryptocurrencies such as bitcoin and launch a framework for an official digital currency issued by the RBI.
- The law will create a facilitative framework for creation of the official digital currency to be issued by the central bank.
- The proposal to ban cryptocurrency is among the 20 bills to be considered at the Budget session of parliament.
- In a recent note, the Reserve Bank of India (RBI) mentioned that it was working on developing its own digital legal tender that has the backing of the state.
How are cryptocurrencies different from INR or USD?
- Cryptocurrency can be described as a private currency, as opposed to regular currencies in circulation worldwide, which are all backed by sovereign guarantees.
- For instance, a Rs 100 note bears a promise guaranteed by the RBI Governor that the piece of paper is worth Rs 100.
- In the case of crypto currency, no such sovereign guarantees exist.
- Instead, the value of a crypto like bitcoin is backed by complex programming that is safe,
- Cannot be altered by anyone individually and contains multiple checks and balances with regards to the value.
- Thus simply, it is a form of currency, which can be transferred through the internet from one person to the other.
Central bank digital currency (CBDC)
- The central bank wants to develop its own digital currency.
- Unlike privately held cryptocurrencies, a CBDC will have the backing of the RBI and in turn, the government.
- This could take the form of simply converting a share of the total INR in the economy into a completely digital
- It will just be in a digital form, backed and issued by the central bank.
- Just how far the RBI has progressed on this front is not public knowledge, but this is something that is currently under evaluation.
Does this make RBI the first central bank to do so?
- Not at all. In fact, India is lagging far behind with respect to crypto regulations compared to many geographies.
- For instance, China has been working on a digital currency for years.
- This is backed by the Chinese central bank and has the approval of the Chinese government.
- The digital currency is used for transactions through smartphones and is accepted on ecommerce
- portals, offline shops, and other outlets.
- The bank is working with multiple local authorities to push up its adoption in different parts of the country.
That means China has its own cryptocurrency?
- Cryptocurrency has some basic features, which can never be replicated by digital currencies.
- Crypto, by nature, works on the basic principle of anonymity.
- In case of a digital currency, there will be complete tracking by the central bank, just like normal currency.
- Second, cryptocurrency is decentralized.
- There is no one person who has authority over the currency.
- It gets validated and traded by thousands of tech geeks and traders across the world and is backed by the underlying blockchain technology.
But what about UPI, QR codes or cards?
- In case of UPI or card payments, every transaction made is backed by a currency note
- These transactions are done through bank deposits, and these deposits are all backed by INR notes held by banks.
- In other words, a person can just walk up to a bank branch or an ATM and convert his bank balance into currency notes.
- In case of digital currency that will not be possible, because it is completely in digital form and there are no bills anywhere to support that currency.
- It works on people’s trust on the country’s banking system.
Q) The rate at which the Reserve Bank of India lends money to commercial banks is known as?
- Repo Rate
- Base Rate
- Bank Rate
- Reverse Repo Rate
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