Think.Nxt Episode 2: Crypto vs CBDCs, What To Use for Digital Transactions?

The Quint’s Editor-in-Chief Raghav Bahl talks about the (false) equivalence drawn between cryptocurrency and CBDCs.

In this episode of Think.NXT With Raghav, The Quint’s Editor-in-Chief Raghav Bahl talks about the (false) equivalence often drawn between cryptocurrency and the Central Bank Digital Currency (CBDC).

(Image: The Quint/Kamran Akhter)

In this episode of Think.NXT With Raghav, The Quint’s Editor-in-Chief Raghav Bahl talks about the (false) equivalence often drawn between cryptocurrency and the Central Bank Digital Currency (CBDC). He underscores how the two are distinct entities, and ought to be used for different types of financial transactions.

“Just because both are digital does not make them equal. They are very different animals. The CBDC is essentially a fiat currency on a digital ledger. It’s not crypto,” affirms Bahl.

Political economist and politician Praveen Chakravarty, WaxirX co-founder Siddharth Menon, KoinX founder Punit Agarwal and policy advisor and CEO of think tank Policy 4.0 Tanvi Menon joined the discussion on the difference between cryptocurrency and CBDCs.

Chakravarty says that cryptocurrency is “fundamentally different” from CBDCs. He explains how the latter are backed by a central bank while crypto is independent from any statutory architecture.

Chakravarty adds that while engineers and technologists may advocate for the usage of crypto as a currency claiming that it is digitised – by virtue of which, it is faster and more efficient – they will always face a contesting force in the form of central bank, which can digitise the existing fiat currency or cash notes.

Read and watch the full multimedia immersive here.

CBDC – Evolution of Currency?

Siddharth Menon -- co-founder of cryptocurrency platform WazirX -- elaborates how blockchains aide the evolution of currency and enable digital transactions.

“Before the UPI (Unified Payments Interface) era started, banks were used to handling only cash. During the UPI era, we were in version-1, wherein if there is a bank-to-bank transaction, there was one entity keeping track of all the transactions going on between each other,” explains Menon.

UPI is an instant payment system, which was developed by the National Payments Corporation of India (NPCI). It powers multiple bank accounts into a single mobile app (such as Google Pay or Paytm) and allows instant transfer of money between bank accounts as well as merchant payments.

The maximum money one can transfer through one transaction is Rs one lakh. The NCPI is governed by the Reserve Bank of India (RBI). Menon says that with evolving technology and introduction of the open blockchain – a ledger of transactions where anyone can join the network and publish a transaction – it is possible to have a singular ledger which can maintain balance across every bank.

“So, from a central bank point of view, one can directly see the balances of different accounts on the blockchain, and it can be programmed furthermore,” adds Menon.

He says that it is the medium of currency which is undergoing an evolution – from database change to digital transfers.

CBDC or Crypto?

Taking the discussion further, Bahl throws a question to the panelists:    

If one wants to transact money digitally and more efficiently, why would one choose crypto over CBDCs, especially when the value of the former fluctuates but the latter are backed by the government and have less risk? 

To answer this, crypto taxation platform KoinX founder Punit Agarwal says that although both can be used to reach the same end, it is the use case that sets them apart. 

“While CBDCs can offer stability and reliability, cryptocurrency offers independence and anonymity so that funds can be transferred without revealing one’s identity at all or making it a bit private,” explains Agarwal. 

Agarwal adds that while CBDCs are just a digital version of a country’s currency, which is issued by a central bank, cryptocurrencies are used to run blockchains and different networks.

Agreeing with Agarwal, Bahl asserts that the key difference between the two is brought by the degree of anonymity.

Crypto or Cash?

Policy Advisor CEO Tanvi Ratna says that CBDCs or digitisation of fiat money has led to a new monetary order across the world.

“As far as crypto is concerned, it is about creating a system that can be trusted, can be more efficient and more innovative. So, it is crypto that has really spurred the whole revolution and it’s crypto that has been ahead of the curve, in terms of innovation. This is because it’s an open-source system,” she says.

An open-source system is one which is distributed with its source code, so that those who access it have the rights to use, study, modify and distribute it further as they see fit. It is an open collaboration made freely available to the public. Bitcoin, Ethereum and many other cryptocurrencies are built on open-source software.

Ratna says that central banks are moving fast in catching up with the new monetary orders brought in by crypto and CBDCs, and are even talking about a unified payments ledger globally.

“However, which of these systems finds the maximum adoption is ultimately up to the citizens of a country,” Ratna remarks. She illustrates this with the example of the digital Yuan, which wasn’t adopted en masse despite China’s push.

Concurring with Ratna, Bahl says the adoption of CBDCs or Crypto or even UPI will depend on what billions of people will choose in the future, provided there is regulatory framework which levels out the playing field and enforces trust.

“Cryptocurrency has a long way to go there but remember this is a huge new technology, which has the ability to reshape the existing order. It’s too early to say what the ultimate impact of this is going to be,” Bahl concludes.