Digital currency is the new word we getting to hear in recent time. Earlier we heard about cryptocurrency, now it is digital currency. Let us understand what is digital currency and how it works.
What is digital currency?
It is nothing but physical currency we currently use in a digital form. It is created with coding and encryption. It carries the same denomination as in fiat notes.
What is its history?
The concept started in 1983. David Chaum, the pioneer for digital currency founded DigiCash in 1989 to commercialise electronic cash. Subsequently, e-gold was introduced in 1996 as internet money. DigiVash went bankrupt in 1998 and e-gold closed down in 2008. In 2009 bitcoin was launched which marked the beginning of decentralised cryptocurrency era.
What is the difference between with cryptocurrency?
Digital currency refers cryptocurrency, virtual currency, and Central Bank Digital Currency (CBDC). Digital currency commonly refers to CBDC. Otherwise, it is cryptocurrency. The major difference between cryptocurrency and digital currency is that cryptocurrency is unregulated, while digital currency or CBDC is regulated by the Central authority of the country. Cryptocurrency transaction is based on blockchain technology which is a decentralised ledger. Whereas digital currency transactions are maintained in centralised ledger by the central authority. Digital currency is not a commodity which cane traded. Cryptocurrency is treated as commodity and it can be traded.
Which countries have digital currency?
Many countries have taken initiative on it since nineties and many have already implemented in one form or others. Some of them are Japan, Hong Kong, UK, Netherland, Belgium, Antigua and Barbuda, Dominica, Montserrat, Nigeria, The Bahamas, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines. Russia and China are in advance stage of implementing it.
India is a major country which has announced launch of digital currency from December 1, 2022 for whole sale as well as retail transactions.
What is digital rupee?
Reserve Bank of India has launched CBDC which will be known as digital rupee or e₹. Currently it will be available only at select locations through select intermediary i.e. Bank. Customer can choose to receive money from bank either in physical note or digital rupee. Similarly, they would be able to pay to merchants either in cash or in digital rupee.
The participating bank will provide a digital wallet where the credit and debit of digital rupee will happen. This wallet will be accessible in both mobile and computer or tablet. The transaction can be between person to person, person to merchant or merchant to merchant. The digital rupee will be a legal tender, which means you can use it to buy what you want.
One can revert to cash from digital rupee and vice versa. However, digital rupee will not earn any interest.
Initially it is being launched in four metros of India with participation of four banks. Later, four more banks will join and it will be made available to five more cities. After learning from this phase, digital rupee will be expanded to the whole of the country.
Why it is needed?
As technology is evolving, all product and services are moving towards technical platform. Currency also no different. Eventually, it is going to be a virtual currency worldwide. The major advantages are,
- It will work against popularity of cryptocurrency, which is decentralised and unregulated.
- Payment system will be available to all type of customers round the clock.
- Payments will be more direct without many intermediaries.
- The transaction cost will be low.
- Transactions will be settled on real time basis.
- Irrespective of amount, it will be mobile with the customer all the time.
- Reduces the note printing and storing cost.
How is it different from other payment apps?
All payment apps like paypal, PhonePe, GPay etc have to be linked to a bank account or active card to do transactions. Once digital currency become operational the customer will have choice to pay or receive in digital currency as well, in which case it will be credited or debited from the wallet provided by the bank. As such payment apps are intermediary only. They will have to upgrade for digital currency transaction.
Is there any disadvantage?
All good things has its own drawback as well.
- Though it does not require any physical storage facility, it cannot be accessed without a device like mobile phone or computer and internet connection.
- It being available in online platform, its prone to hacking and cyber security.
- It requires technical upgration both at issuers end as well users end.
Is there any law for it?
The European Union is adopting E-Money Directives” since 2001 for prudent supervision of electronic money business. USA governs electronic money under the provision of Uniform Commercial Code and Electronic Fund Transfer Act.
Similarly, other countries also have adopted laws for supervision of electronic money.
In India, though there is no definite law on digital currency, it is supervised by RBI and SEBI through awareness campaign. The Government has also levied 30% tax on virtual assets.