Erik Weijers, 2 months ago

India will test digital rupee

In small-scale pilot launches, the Central Bank of India is going to roll out a digital form of the rupee: the e-rupee. In doing so, it will compete with crypto, the issuance of which, of course, the government has no direct control over.

With Central Bank Digital Currencies (CBDC), a resident gets an account with the Central Bank. Think of an app on which the Central Bank can deposit money directly, without the mediation of a normal bank. This obviously gives the government a lot of control and insight into the financial whereabouts of residents.

Following in the footsteps of China

With the pilot, India is following in the footsteps of China, which is the most advanced in introducing its own digital central bank money. The EU and the United States are currently exploring whether and how to introduce a CBDC. Interestingly, India is considering two variants of a CBDC: one for smaller transactions between consumers and consumers and businesses and one for the large transactions between banks.

Counterbalance to crypto

The Indian Central Bank argues that the e-rupee can coexist with paper money and also serve as an alternative to crypto currencies. India has long been hostile to crypto but has realized that crypto is not going away. Earlier this year, India's finance minister announced that he would allow crypto ownership and tax profits at 30%. If you can't beat them, join them....

And "them" are many. Chainalysis released a report on Sept. 14 on the state of crypto markets worldwide. What about adoption by country? India ranked No. 4, after Vietnam, the Philippines and Ukraine. Over 100 million residents are investing in crypto and the share of young people is skyrocketing.

Why governments love central bank digital money

Central bank digital currencies are a new technological manifestation of fiat money (dollars, euros etcetera). It is digital cash. But precisely because it is digital, there are major differences from cash in terms of privacy and control. A CBDC can lead to loss of privacy: transactions can easily be monitored by the government. It is conceivable that transactions could be blocked, namely if you want to spend money on things the government does not like. A ban on cash combined with CBDCs allows for hefty negative interest rates.

And that is why it is so good that we have crypto. Crypto can work as a counterbalance to already overblown lack of privacy of CBDCs. CBDCs will obviously never be completely anonymous, as the Central Bank of India readily admits. But if they are introduced as a total surveillance tool, people will flee to crypto and the government will lose power. Crypto keeps the government in check.

Although many crypto enthusiasts are not exactly fans of CBDCs, the introduction is, in short, bullish for crypto. Not only does it make crypto stand out as an alternative, as mentioned above. But also, CBDCs make the barrier to integrating crypto into everyone's lives much lower. After all, the underlying technology of CBDC will be a bit like crypto. There are likely to be apps that will enable swapping between CBDC and crypto.

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