Saturday, February 05, 2022
The highlight of this week was BUDGET 2022 where the honourable Finance Minister announced a flat 30% tax on the transfer of digital assets. The tax may seem unfair to many, however, the industry leaders see it as a path towards progress. From 10 year imprisonment to 30% tax, we have come a long way. Those who heard the finance minister will vouch that India is more tech savvy than many realize - digital universities, drone farms, telemedicine, open source development, such terms coming from the Finance Minister of a country, that too in the parliament shows the pace with which we are moving.
FM also announced the launching of digital rupee by RBI in the coming financial year.
“Digital rupee will be issued using blockchain and other technologies by RBI starting 2022-23. This will give a big boost to the economy.”
~ FM Nirmala Sitharaman while presenting Budget 2022
A digital currency using Blockchain? This actually doesn’t make much sense, but let’s decode.
People often confuse cryptocurrency with central bank digital currency(CBDC) and vice versa, however, there is a fundamental difference between the two. Cryptocurrencies use cryptography to secure the entire network and there is no one single point of failure. However, digital currencies are nothing but payments made on the internet. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different. Then how does it differ from UPI? The difference is more on the backend side and for the users using, it almost remains the same. CBDC eliminate the intermediaries - which are the bank balances. CBDC is directly issued by the Central bank to the users, hence eliminating the movement of bank balances, thus making the system more efficient.
“CBDCs have some clear advantages over other digital payments systems – payments using CBDCs are final and thus reduce settlement risk in the financial system. Imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over – the need for interbank settlement disappears. CBDCs would also potentially enable more real-time and cost-effective globalisation of payment systems. It is conceivable for an Indian importer to pay its American exporter on a real-time basis in digital Dollars, without the need of an intermediary. This transaction would be final, as if cash dollars are handed over, and would not even require that the US Federal Reserve system is open for settlement. Time zone difference would no longer matter in currency settlements – there would be no ‘Herstatt’ risk.””
~ T Rabi Shankar, Deputy Governor of RBI
Further, cryptocurrencies are decentralized, that is there no single authority controlling the network. Neither there is an issuer. The protocol says that the number of tokens will always be fixed, thus making it a deflationary protocol. The transactions are maintained on the BLOCKCHAIN, which is a distributed ledger secured using cryptographic techniques and maintained by the people participating in the network, who get rewarded for the same. On the other hand, CBDC as the name suggests are maintained by the central banks and can be regulated by RBI in the case of India. As of now we do not know what cryptographic techniques Digital Rupee will use and if it will be interoperable with other decentralized tokens such as bitcoin, ethereum. But what we do know is that it will be a centralized currency, yet leverage the use of Blockchain.
A centralized currency using blockchain. Who will mine the blocks in the chain? Will there be only one node maintaining the chain? Does it make a single point of failure? How will it work? We don’t know yet.
If RBI decides to issue CBDC directly to the users, will it not render banks useless? How about the cyber attacks, since it is a central authority maintaining and issuing the currency? Well, seems like we will have to wait to get a clear picture.
Leaving you with this twitter thread I read back in 2021 about CBDC.
See you on next Saturday, until then have a great weekend :)
Cheers!
Some things that you may find interesting-
Article: Does not compute
Video: The 12 tasks of Asterix (Bureaucracy is frustrating)
Song I am listening to: La Vie En Rose by Emily Watts
Thought of the week: “In a sea of misinformation, knowing what you are looking for is a rare skill.”
Here are the last three posts if you were too occupied to read them: