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‘Britcoin’ not bitcoin

Context:

The British finance minister told the Bank of England (BoE) [Similar to RBI in India] to look at the case for a new “Britcoin”, or central bank-backed digital currency, aimed at tackling some of the challenges posed by cryptocurrencies such as bitcoin.

Relevance:

GS-III: Science and Technology (Developments in Science and Technology, Application of Technology in Daily life, Blockchain technology)

Dimensions of the Article:

  1. What are cryptocurrencies?
  2. How are they different from actual currency?
  3. How do cryptocurrencies derive their value?
  4. About Britcoin
  5. Understanding Central Bank Digital Currency (CBDC)

What are cryptocurrencies?

  • Cryptocurrencies are e-currencies that are based on decentralized technology and operate on a distributed public ledger called the blockchain.
  • Blockchain records all transactions updated and held by currency holders.
  • The technology allows people to make payments and store money digitally without having to use their names or a financial intermediary such as banks.
  • Cryptocurrency units such as Bitcoin are created through a ‘mining’ process which involves using a computer to solve numerical problems that generate coins.
  • Bitcoin was one of the first cryptocurrencies to be launched and was created in 2009.

How are they different from actual currency?

  • The Main difference is that unlike actual currencies cryptocurrencies are not issued by Governments.
  • Actual money is created or printed by the government which has a monopoly in terms of issuing currency. Central banks across the world issue paper notes and therefore create money and assign paper notes their value.
  • Money created through this process derives its value via government fiat, which is why the paper currency is also called fiat currency.
  • In the case of cryptocurrencies, the process of creating the currency is not monopolized as anyone can create it through the mining process.

How do cryptocurrencies derive their value?

  • Any currency has its value if it can be exchanged for goods or services and if it is a store of value (it can maintain purchasing power over time).
  • Cryptocurrencies, in contrast to fiat currencies, derive their value from exchanges.
  • The extent of involvement of the community in terms of demand and supply of cryptocurrencies helps determine their value.

About Britcoin

  • In the wake of declining cash payments in the country partly due to the Corona pandemic, the Bank of England and the Treasury are considering creating Digital Currency.
  • The Digital currency, if passed, would exist alongside cash and bank deposits and act as a new form of money to be used by households and businesses in England.
  • It would sit at the interface between cash and private payments systems and would not necessarily be based on distributed ledger technology.
  • This ‘britcoin’ would be tied to the value of the pound to eliminate holding it as an asset to derive profit.
  • The move could have an economic impact in the form of wider investment into the UK tech sector and lower transaction costs for international businesses.
  • Britain’s digital currency would be different in a key sense as if passed, it would be issued by state authorities. Currently, only the Bahamas has such a currency, though China is trialing it in several cities.

Understanding Central Bank Digital Currency (CBDC)

  • A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region).
  • A CBDC is centralized – i.e., issued and regulated by the competent monetary authority of the country.
  • Each unit acts as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account.

Advantages of CBDC

  • CBDC aims to bring in the best of both worlds—the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system.
  • New forms of digital money could provide a parallel boost to the vital lifelines that remittances provide to the poor and to developing economies.
  • It will ensure that people are protected from financial instability caused due to the failure of private payments systems.
  • Ensures that central banks retain control over monetary policy against the remote possibility that payments might migrate into cryptocurrencies over which they have no leverage.

Issues with CBDC

  • There is a need to enforce strict compliance of Know Your Customer (KYC) norms to prevent the currency’s use for terror financing or money laundering.
  • Existence of digital money could undermine the health of commercial banks as it removes deposits on which they primarily rely for income.

-Source: The Hindu

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September 2022
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