BlogChain #3: India Tests the Waters on a Digital Currency
This could be a massive turning point in the movement to treat cryptocurrencies as a currency
On July 22, the Reserve Bank of India announced that they were exploring the possibility of a digital rupee. Along with China, they're one of the few countries exploring fiat currency on the blockchain.
To most crypto enthusiasts, this goes against everything that cryptocurrencies stand for. But for India, their unique economic situation makes it a perfect breeding ground to release the world's first digital currency.
The Setting
In their speech, India made sure to announce two interesting facts:
Digital payments + crypto investments have exploded over the last year.
Cash remains the preferred method of payment. especially with a large portion of the population remaining unbanked.
This is a situation where a Central Bank Digital Currency (CBDC) has an environment to thrive in. Giving people who don't have bank account a secure method of spending cash can be a game-changer.
The Benefits
There are several tangible benefits to a digital currency for Indian citizens as well as the Indian government
For the average citizen, this presents an opportunity to create a digital financial footprint, something many Indians don't have. A large portion of the population remains unbanked, and this can be their opportunity to move beyond dependence on denomination and provide more security for the money that they earn.
For the government, it's more control. Once again, governments controlling a network and digital currency is the antithesis of what crypto represents, but this will allow India a greater ability to prevent financial crimes. The nature of the blockchain won't allow counterfeits and double spending while a full overview of all transactions will make money laundering and black market washing harder. There's also a monetary bonus of being able to levy a small tax on every transaction on the network much like gas/miner fees work on traditional crypto networks.
CBDC vs Crypto
I've mentioned this several times in this post, but I'll emphasize it again: this isn't a cryptocurrency. Cryptocurrencies are defined by their anonymity, from spending to consensus. There is no single administrator or entity with full access to the network.
The RBI has no interest in relating their currency to crypto. In their speech, they themselves stress that they aren't interested in replicating a crypto currency, but instead to borrow the security aspects of the blockchain (they actually don't mention blockchain, but it's a reasonable assumption) to create an extension of their fiat currency.
It's not clear that this is good for crypto. Moves like this make it far less likely that India is going to copy El Salvador and allow bitcoin to be legal tender. Instead, this might be the first in a wave of countries taking advantage of the current crypto sentiment and its security aspects to launch their own centralized digital fiat currencies.
It's going to interesting to see how crypto investment and usage changes in India after this CBDC is minted. NFTs and other opportunities have seen a shift to more usage of crypto as a currency rather than just an investment vehicle. But, with a more stable currency as an alternative, does India still use BTC/ETH as a currency, or revert back to an investment approach.
Final Thoughts:
This release is a massive inflection point for blockchain and crypto. Crypto has existed outside of governments, insisting that the value lies in the technology and the network effects. It's led to coins with massive market caps, but does that hold up when you have a government adopting the technology and promising value through their support. These are the first steps into a brave new world and I'm really excited to see where it goes.