DIGITAL CURRENCY

Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet.
Types of digital currencies include
Cryptocurrency
Virtual currency
Central bank digital currency.
Digital currency may be recorded on a distributed database on the internet, a centralized electronic computer database owned by a company or bank, within digital files or even on a stored-value card.

Cryptocurrency:

A cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system
Most popular types of cryptocurrencies such as Bitcoin, Litecoin, and Ethereum.

Virtual Currency:

Virtual currency, or virtual money, is a digital currency that is largely unregulated and issued and usually controlled by its developers and used and accepted electronically among the members of a specific virtual community.
In 2014, the European Banking Authority defined virtual currency as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.”
A digital currency issued by a central bank is referred to as a central bank digital currency.

Central bank digital currency (CBDC)

A Central Bank Digital Currency (CBDC), or national digital currency, is simply the digital form of a country’s fiat currency. Instead of printing paper currency or minting coins, the central bank issues electronic tokens. This token value is backed by the full faith and credit of the government.

Context:

The Reserve Bank of India this launched the digital rupee on a pilot basis. The digital currency will be offered by a select group of public and private banks in a few major cities initially, which can be used for both person to person and person to merchant transactions.

What is the digital rupee?

The digital rupee, or the e rupee, is a central bank digital currency issued by the RBI.
It is similar to the physical cash that you hold in your wallet except that the e rupee is held electronically in a digital wallet overseen by the RBI.
The digital rupee is recognised as legal tender by the RBI, and thus has to be accepted by everyone in the country as a medium of exchange.
It is, however, different from deposits that you hold in a bank. Unlike deposits which are paid interest, the digital rupees in your wallet are not paid any interest by the central bank.
Deposits held in banks can be converted into digital rupees and viceversa.

Features of CBDC include:

CBDC is sovereign currency issued by Central Banks in alignment with their monetary policy
It appears as a liability on the central bank’s balance sheet
Must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
Freely convertible against commercial bank money and cash
Fungible legal tender for which holders need not have a bank account

Is there a need for the digital rupee?

Digital rupee will make the rupee more attractive as a currency to users when compared to cryptocurrencies.
Digital rupee will be easier and more economical to produce when compared to physical cash notes.
More importantly, transactions carried out using digital rupees, in to physical transactions, are more easily traceable by authorities.

What are the risks?

Potential cybersecurity threat.
Lack of digital literacy of population.
Introduction of digital currency also creates various associated challenges in regulation, tracking investment and purchase, taxing individuals, etc.
Threat to Privacy: The digital currency must collect certain basic information of an individual so that the person can prove that he’s the holder of that digital currency.

Note

Blog