S Murlidharan

Digital currencies may do little beyond piquing curiosity

S Murlidharan | Updated on June 04, 2020

The trend of central bank-backed sovereign digital currency seems to be catching on. But India is a long way off from introducing it in the system

China, which has been chafing at the denial of a numero uno status to its economy and currency, will soon be the first country to issue sovereign digital currency (SDC) after the successful pilot run of the central bank digital currency (CBDC) in select states. The e-krona of Sweden has also been tested in a pilot run in collaboration with Accenture, but in a smaller capacity.

What exactly is a ‘digital currency’, and how does it differ from cryptocurrencies like Bitcoin and Facebook’s proposed Libra? Digital currency, unlike crypto, is legal tender and has the same value as its notes and coins. Its lynchpin would be the central bank of the country. The bottomline is, commercial banks of the country that have embraced an SDC would be marginalised to the extent that people of the nation have a direct interface with the nation’s central bank through blockchain technology. The implications of this tectonic shift are awesome. In fact, the possibility of throwing commercial banks out of business is what makes countries like Japan possible SDC skeptics.

But for common folks and businesses, this is a godsend, inasmuch as dealing with the central bank of the nation rpovides better credibility — a commercial bank contains risks, your deposits can vaporise if they are not insured. In other words, the central bank would honour its debt to you, come what may. But at the same time, the central bank would know who owns how much of the digital currency. So no transaction through the currency would be faceless. In fact, money laundering would become that much more difficult. Therefore, resistance to the SDC can come from crooks too.

Central banks of the world have been viewing Bitcoin and Libra with trepidation. Libra threatens the international payments and currency order with its formidable reach. However, it would be a cryptocurrency in the technical sense. The generation of Bitcoin is fairly well-known — it does take a mathematical mind to mine one. In India, Bitcoin came back in business after the Supreme Court overruled the RBI ban. But the SC took pains to explain that its legality did not confer legal tender.

If you cannot beat them, join them goes the cliché. Central banks of the world have been for sometime toying with the idea of digital currencies as a cross between fiat currency and cryptocurrency. And there is a difference between digital currency and digitised currency. The latter is embedded in credit and debit cards, e-wallets and net banking accounts. But digital currencies are going to be new-fangled central bank-issued currencies that have no physical characteristics. An analogy is in order. There are newspapers without a print edition and there are newspapers with both print and net edition. A digital currency is like a newspaper without a print edition, whereas a digitised currency is like a newspaper that has both versions.

By trying to wean away people from physical cash into a digital currency sponsored by the central bank, the government would be addressing the concerns of depositors of banks such as PMC Bank and YES Bank. It would also be weaning them away from ‘unsupervised’ cryptocurrencies. But the SDC is still an idea whose time has not come, at least as far as India is concerned — despite the fact that should it be launched, it would have the solid backing of the RBI. Maybe its time has come in Sweden, where people have already learned to live without cheques and demand drafts; but here the concept borders on intrigue. It might, however, stoke the curiosity of netizens and nerds at best, and even hold interest for corporates and HNW individuals.

The writer is a Chennai-based chartered accountant

Published on June 04, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like