You are currently viewing Digital Currency

Digital Currency

“Money is not the only answer but it makes difference”

A currency is a standard form of money or system of money, as a medium of exchange and with a common use in specific environments especially for people living in that nation, for example: coins and banknotes. According to many historians money was issued for the first time during the kingdom of Lydia (present day Turkey).  Paper currency is such representative money, and it is essentially a debt instrument. It is a liability of the issuing central bank (and sovereign) and an asset of the holding public.

Advancement in technology has made it possible for the development of new forms of money i.e  Central Bank Digital Currencies (CBDCs). RBI has been exploring the pros and cons of introduction of digital currency for some time and is currently engaged in working towards a phased implementation strategy. Digital currency is any currency, money or money like asset that is stored in computers and all over the internet. Irrespective of the form of money the digital currency will still perform the three primary functions: medium of exchange – can be used for transactions, a unit of account – can be used to value goods and services in monetary terms, and a store of value – can be stored or conserved for future purposes.

CBDCs being the sovereign currency hold many advantages along, like trust, safety, liquidity etc. the key motive of issuance of CBDCs include reduction in operational cost of printing the notes boosting innovation, efficiency and reduction in physical currency crimes. The use of offline features in CBDCs will help the people living in areas with less mobile networks to transfer digital currency. 

CBDC can be classified in two types: CBDC used for general purpose or retail (CBDC – R), and CBDC used for wholesale (CBDC – W).  the retail currency will be available for all the general public, business institutions and non financial consumers whereas the wholesale currency will be available only for the financial institutions. 

There are two models of issuing and managing the CBDCs; the direct model where the central bank is wholly responsible for issuance and managing the currency and transactions whereas the indirect model where in the central bank along with the other banks o0r similar service providers plays their respective roles from issuance and management of the currency. 

CBDC can be structured as token based or account based. A token based CBDC is a currency that shows one’s ownership of that token, so if you receive one you’re the owner of that token, whereas an account based CBDC will require maintenance of all the transactions and records of that CBDC. 

CBDCs being digital in nature, technology plays an important role. There are two technologies used in the infrastructure, centrally controlled database or distributed ledger technology. Both the technologies differ in terms of efficiency and degree of protection.

For CBDC to play the role as a medium of exchange, it needs to incorporate all the features that physical currency represents including anonymity, universality, and finality. The degree of anonymity takes into account the probability associated with each user, it begins by defining the entropy of the system (here is where the papers differ slightly but only with notation, we will use the notation from. Ensuring anonymity in digital currency is a challenge as all the digital transactions would leave a trail. 

Although cash remains the king, as evident in high currency in circulation (CIC), the digital payment ecosystem grew exponentially in the last few years. In the financial year 2022, over 72 billion digital transactions were recorded across the country. The top three digital currency users are:

But CBDC is aimed to complement current forms of money and to provide an additional payment avenue to users, but not to replace the existing payment systems. Supported by state-of-the-art payment systems of India that are affordable, accessible, convenient, etc. the Digital Rupee (e₹) system will further bolster India’s digital economy, make the monetary and payment systems more efficient and contribute to furthering financial inclusion.

Leave a Reply