• CBDC is the same as currency issued by a central bank but takes a different form than paper.
• It is the sovereign currency in an electronic form and it would appear as a liability (currency in circulation) on a central bank’s balance sheet.
• The underlying technology, form, and use of a CBDC can be molded for specific requirements. CBDCs should be exchangeable at par with cash.
• While interest in CBDCs is universal now, very few countries have reached even the pilot stage of launching their CBDCs.

• CBDC will be backed by distributed ledger technology (DLT) but will be a permissioned blockchain which will make it different from other permissionless crypto assets.
• The central monetary authority will have control access to the blockchain.
• Central banks are facing dwindling usage of paper currency and now seek to popularize a more acceptable electronic form of currency.
• Digital currency will be more efficient and will be able to avoid the damaging consequences of private currencies.

Cryptos as currency:

• A CBDC will not solve the RBI’s problem since it can only be a fiat currency and not a crypto. However, cryptos can function as money. This difference needs to be understood.
• A currency is a token used in market transactions. Historically, commodities (such as copper coins) have been used as tokens since they themselves are valuable.
• But paper currency is useless till the government declares it to be a fiat currency. It is only then that everyone accepts it at the value printed on it.
• So, paper currency derives its value from state backing. Cryptos are a string of numbers in a computer programme and are even more worthless.
• Bitcoin, the most prominent crypto, has been designed to become expensive.
• Its total number is limited to 21 million and progressively requires more and more computer power and energy to produce (called mining, like for gold). As the cost of producing bitcoin has risen, its price has also increased.
• This has led to speculative investment which drives the price higher and attracts more investors. So, since 2009, in spite of wildly fluctuating prices, they have yielded high returns making speculation successful.

When concept of CBDC pioneered in India?

• On the digital currency side, Finance Minister Nirmala Sitharaman in her Budget 2022 speech mentioned that India will take the route of Central Bank Sponsored Digital Currency. She said that the introduction of CBDC or digital currency, will give a big boost to digital economy.
• "Introduction of Central Bank Digital Currency (CBDC) will give a big boost to digital economy.
• Digital currency will also lead to a more efficient and cheaper currency management system.
• It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23," said the Budget document. A blockchain is basically a digital ledger that records transactions that can be tracked.
• The currency, called 'digital rupee', will be issued by the Reserve Bank of India (RBI) in digital form and will be fungible with physical currency.
• Central bank digital currencies, or (CBDCs) are digital or virtual currencies. They are basically the digital version (in an electronic form) of fiat currencies, for India that would be its domestic currency rupee.
• Blockchain enables decentralisation.
• That is, everyone on the crypto platform has a say. But central banks would not want that.
• Further, they would want a fiat currency to be exclusively issued and controlled by them. But, theoretically everyone can ‘mine’ and create crypto.
• So, for the CBDC to be in central control, solving the ‘double spending’ problem and being a crypto (not just a digital version of currency) seems impossible.
• A centralized CBDC will require the RBI to validate each transaction — something it does not do presently. Once a currency note is issued, the RBI does not keep track of its use in transactions.

Centralized CBDC:

• CBDCs are not going to replace bitcoin or cryptocurrencies unless they are part of a broader state plan to crack down on bitcoin.
• The centralized nature of CBDCs will enable more surveillance and further erode financial privacy of individuals in the economy.
• One can argue that there are costs to handling cash and coin, from inconvenience to loss of tax revenue, which CBDC’s would resolve.
• No matter what circumstances the implementation of CBDC occurs under, Bitcoin will never die, and the community’s ingenuity and creativity will ensure we have a market and economy thriving with Bitcoin as the people’s currency.
• The RBI has been working on a phased implementation strategy for a central bank digital currency since last year.
• In a speech last year in July, RBI Deputy Governor T. Rabi Sankar had said that the central bank is working on a phased implementation strategy for a central bank digital currency (CBDC) and examining use cases to ensure that there is little or no disruption.
• They are not commodities or claims on commodities as they have no intrinsic value; some claims that they are akin to gold clearly seem opportunistic.
• A CBDC is the same as a currency issued by a central bank but takes a different form than paper.

Where to buy and store Cryptocurrecny ?

• You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:

 Step 1: Choosing a platform

•  The first step is deciding which platform to use. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:
• Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
• Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.
• When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.

 Step 2: Funding your account

•  Once you have chosen your platform, the next step is to fund your account so you can begin trading. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies by platform.
• Crypto purchases with credit cards are considered risky, and some exchanges don't support them. Some credit card companies don't allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.
• Some platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform. Equally, the time taken for deposits to clear varies by payment method.
• An important factor to consider is fees. These include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.

Step 3: Placing an order

• You can place an order via your broker's or exchange's web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting "buy," choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order. The same process applies to "sell" orders.
• There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:
• Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market.
• Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from.
• Blockchain stocks or ETFs: You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.
• Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely.
• Some exchanges provide wallet services, making it easy for you to store directly through the platform.
• However, not all exchanges or brokers automatically provide wallet services for you.

Who regulates Crypto and CBDCs?

• The Fundamental difference between the digital rupee and cryptocurrency will be that the digital rupee, being issued by RBI will most likely be Centralised. On the other hand, Cryptocurrencies are decentralised and can not be controlled by a single entity.
• The digital rupee might be legal tender whereas cryptocurrencies will not be treated as legal tender in India any time in the near future.
• Cryptocurrency is privately created and it is a very big threat to the country's macroeconomic and financial stability.
• The CBDC could be on a private blockchain or a permissioned blockchain instead of a decentralized blockchain.
• In a permissioned blockchain network, banks and other financial institutions that have partnered with the central bank (in this case, the RBI) would facilitate transactions for their respective clients by hosting nodes. Besides them, no one else would have a similar role or access to the permissioned blockchain,"
• The RBI has been strongly opposing private cryptocurrencies as they could have implications on financial stability.
• The digital rupee will be the digital version of physical cash issued by the RBI and will, therefore, be sovereign backed.
• On the other hand, cryptocurrencies are not backed by a government / central bank and can be an asset class or a payment mechanism.
• The digital rupee will be different from Bitcoin, Ethereum and other cryptocurrencies in the sense it will be backed by the government.
• Secondly, having an intrinsic value on account of government backing, the digital rupee will be equivalent to holding a physical rupee equivalent.
• In short, CBDC is just the digital form of the legal currency used in the country and is not a private currency.
• A cryptocurrency is a decentralised digital asset and a medium of exchange based on blockchain technology.
• However, it has primarily been controversial due to its decentralised nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities.
• This makes it immune to the government's interference or manipulation.
• Also, its value is determined by the free market forces and is not linked to any commodities. Thus it does not have any intrinsic value
• On the Contrary, Central Bank Digital Currency (CBDC) issued by the Reserve Bank of India (RBI) will be a legal tender in a digital form.
• “It is the same as a fiat currency (government-issued currency) and can be exchanged one-to-one with existing currency.

How does cryptocurrency work?

• Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
• Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
• If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
• Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future.
• Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.

Examples

• Bitcoin: Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
•  Ethereum: Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
•  Litecoin: This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
•  Ripple: Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.