Cryptocurrency vs CBDC

  • July 21, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Cryptocurrency vs CBDC

Subject :Economy

Section: Banking

Context:

Phased implementation of CBDC for wholesale, retail segments in the works, says RBI ED Choudhary

Cryptocurrency vs CBDC:

BasisCryptocurrency Central Bank Digital Currency
Meaning Digital token issued  by a private institution or firm.Central bank digital currencies are digital tokens, similar to cryptocurrency but issued by a central bank.
Legality Not a fiat currency as not backed by the government.A central bank digital currency is the digital form of a country’s fiat currency.
Technology Based on cryptography and blockchain technology i.e a public ledger needs every user consent for transaction.Central bank digital currencies are designed to be similar to cryptocurrencies, but they may not require blockchain technology or consensus mechanisms.
Intrinsic value No intrinsic value but used for transaction due to acceptability, scarcity and anonymity.They are pegged to the value of that country’s fiat currency.
Regulation Cryptocurrencies are unregulated and decentralized thus, involving anonymous transactions.As a centralized form of currency, they may not anonymize transactions as some cryptocurrencies do.
Effect on monetary policy Complicates monetary policy transmission for being a parallel unregulated currencyCBDCs promote financial inclusion and simplify the implementation of monetary and fiscal policy.
Value Cryptocurrencies are highly volatile, with their value constantly fluctuating.CBDCs, backed by a government and controlled by a central bank, would provide households, consumers, and businesses with a stable means of exchanging digital currency.
Acceptability Their value is dictated by investor sentiments, usage, and user interest.Legal backing
Spending Double spending as software on a computer can be used repeatedly.Fiat currency has the property that once spent, it cannot be spent again except through forgery, because it is no more with the spender.

RBI amendment Act:

Recently, the Reserve Bank of India (RBI) has proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch a Central Bank Digital Currency (CBDC), thus enhancing the scope of the definition of ‘bank note’ to include currency in digital form.

Reserve Bank of India Act, 1934:

  • It was enacted on 6 March, 1934 to constitute the Reserve Bank of India.
  • This law commenced from April 1, 1935. 
  • It provides a framework for the supervision of banks and other related matters.
  • Important Provisions:
    • Section 3 of the RBI act provides for the establishment of Reserve Bank of India for taking over the management of the currency from the Central Government and for carrying on the business of banking in accordance with the provisions of this Act.
    • Section 4 of the RBI Act defines the capital of RBI which is Rs. five crore.
    • Section 7 of the RBI Act empowers the central government to issue directions in public interest from time to time to the bank in consultation with the RBI Governor. This section also provides power of superintendence and direction of the affairs and business of RBI to the Central Board of Directors.
    • Section 17 deals with the functioning of RBI.
      • The RBI can accept deposits from the central and state governments without interest.
      • It can purchase and discount bills of exchange from commercial banks.
      • It can purchase foreign exchange from banks and sell it to them.
      • It can provide loans to banks and state financial corporations.
      • It can provide advances to the central government and state governments.
      • It can buy or sell government securities.
      • It can deal in derivative, repo and reverse repo.
    • Section 18 describes emergency loans to banks.
    • Section 21 assigns RBI the duty of being banker to the central government and managing public debt.
    • Section 22 -grants power to RBI to issue the currency
    • Section 24 has provision that highest denomination note could be Rs10,000
    • Section 28 empowers the RBI to form laws concerning the exchange of damaged and imperfect notes
    • Section 31 provides that in India RBI and central government only can issue and accept promissory notes that are due on request
    • Section 42(1) provides that every scheduled bank need to hold an average daily balance with the RBI
Cryptocurrency vs CBDC economy