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What is digital currency? How's it different from crypto-currency? All questions answered

New Delhi Edited By: Riya TeotiaUpdated: Dec 01, 2022, 10:48 PM IST
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Reserve Bank of India (RBI) announced the launch of India's much-awaited digital currency on Thursday, 1st December. The announcement about the digital currency was first made by Finance Minister in the 2022 Budget speech, and since then there has been a lot of chatter about what exactly a digital currency is and how is it different from the trending crypto-currencies. Here are answers to some of these questions:

RBI launched India's first-ever digital currency, Central Bank Digital Currency (CBDC) on Thursday, 1st December. To launch the digital currency, the RBI will make amendments to the Reserve Bank of India Act, of 1934. The RBI has said they are launching digital currency with an aim to mitigate the risks and trim costs in the handling of physical currency. 

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What is digital currency?

Digital currency is a digital form of paper currency or fiat currency that can be exchanged in transactions for actual currency. This currency is backed by the country's central bank whose legal tender is also issued and is essentially e-cash that doesn’t need any special indigenous methods to encrypt them. All online transactions involve digital currency but when you withdraw that money from a bank or an ATM, it is converted into liquid cash. In simple words, digital currency can be used in place of paper currency for all transactions.

What is crypto-currency and how is it different from the digital currency? 

Crypto-currency is not backed by the central bank of a country but instead derives its purchasing power from its user community. Technically, they are pieces of code generated by 'mining' that are managed via a digital ledger known as blockchain to ensure transparency at every stage of their journey. In other words, they are decentralised virtual currencies as they are not issued by the state and do not have the status of 'legal tender'. Its value is independent of central banking authorities and even regional geopolitical problems. 

Some global developments in e-currency:

1. China was the first major economy to launch a pilot digital currency by the name of e-CNY in April 2020. 

2. Bahamas has been the first economy to launch its e-currency worldwide by the name of- Sand Dollar ($B), which is issued by the Central of The Bahamas. 

3. Nigeria also rolled out its digital currency, e-Naira in 2020. It serves both as a medium of exchange and a store of value and claims to offer better payment prospects in retail transactions when compared to cash. 

4. South Korea, Sweden, Jamaica, and Ukraine are some of the countries to have begun testing their process for digital currency.