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02 May Cryptos and CBDC

Posted at 02 May 2022 in Current Affairs by Anshum Verma 0 Comments

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The central bank must note that a Central Bank Digital Currency (CBDC) can only be a fiat currency and not a crypto.

What are crypto assets?

A crypto asset is a digital asset; but not all digital assets are crypto assets.
The distinguish features of crypto assets:
- uses cryptography
- depends on distributed ledger technology
- no need for a third party such as a bank to issue crypto assets
- have three primary uses: as an investment, a medium of exchange, and to access goods and services.
Crypto assets are commonly known as cryptocurrencies such as Litecoin, Ripple, Bitcoin, and Ethereum.

A CBDC is a legal tender issued by a bank in a digital format.
Also known as digital base money or digital fiat currencies, a CBDC is no different from hard cash, apart from the fact that they are in a digital or virtual form.
It is not meant to replace hard cash but coexist as an additional form of payment method.

What were the different stands taken on cryptos?

Finance minister– In the Budget session, it was said that Cryptocurrency will be discouraged via taxation and capital gains provisions.
RBI Governor– The Governor of the RBI highlighted that private cryptocurrencies are a big threat to our financial and macroeconomic stability.
Also he said that these cryptocurrencies have no underlying asset.
Deputy Governor of RBI– A Deputy Governor of the RBI called cryptos worse than a Ponzi scheme and argued against legitimizing them.
Supreme Court– The Supreme Court of India has asked the Government whether or not cryptos are legal.

A currency is a token used in market transactions.
Historically, commodities (copper coins) have been used as tokens since they themselves are valuable.
But paper currency is useless till the government declares it to be a fiat currency as it derives its value from state backing.
Cryptos are a string of numbers in a computer programme and there is no state backing.
Cryptos acquire value and can be transacted via the net which enables them to function as money.

The total valuation of cryptos recently was upward of 2 trillion dollars which is more than the value of gold held globally.
Cryptos which operate via the net can be banned only if all nations come together.
Even then, tax havens may allow cryptos to function, defying the global agreement.

What is the difference between CBDC and cryptocurrencies?

Blockchain enables decentralisation where everyone on the crypto platform has a say but, central banks want a fiat currency to be exclusively issued and controlled by them.
Theoretically everyone can ‘mine’ and create crypto unlike the centrally controlled CBDC. Today Current Affairs
Solving the ‘double spending’ problem and being a crypto (not just a digital version of currency) seems impossible.
A centralised CBDC will require the RBI to validate each transaction.
CBDCs at present cannot be a substitute for cryptos that will soon begin to be used as money. This will impact the functioning of central banks and commercial banks.