What Formed The Basis Of Digital Currency

We hear news of nations researching and adopting digital currency now and then. But you might have heard about the digital currency launched in India. Reserve Bank of India announced the launch of its first digital currency pilot on 1st December 2022. Currency is called central Bank Digital Currency (CBDC) and would have all attributes of paper currency.

Following the footprints of Spain, the pilot project will be commenced with the participation of four banks, namely State Bank of India, ICICI Bank, Yes Bank and IDFC Bank. It will be implemented in Mumbai, Delhi, Bengaluru and Bhubaneshwar. The currency system will be operated and backed directly by the Reserve Bank of India. Called as e-Rupee, the currency will fast-forward India in Digital Currency Market. (RBI Report, 7th October 2022)

India has been in experimenting and piloting phase for CBDC, but do you know what gave digital currency its current form? Do you wonder why digital currency is even important? From implementing the First digital currency in Bahamas under the sand dollar project to nearly 72 nations researching and developing their digital currency presently, let us look at a few of the projects that shaped the basis of digital currency in the world.

However, to begin with, let us quickly look at what is central Bank Digital Currency (CBDC).

Introduction to CBDC:

CBDC is any nation's digital Fiat currency (coin, paper currency). To understand it better, the similar currency of your nation (Euro, dollar, INR) in digital wallet will be termed as digital currency. The currency is interchangeable with paper currency and can be used similarly.

Digital currency is different from Money in your bank as the money is stored in an individual bank account. However, digital currencies are available in digital wallets solely maintained by Central government.

So, in conclusion, digital currency's dependency on individual banks and their bank accounts is diminished since all the money is centrally owned under one account.

How did it all begin?

Many economies follow a two-tier system to regulate financial transactions, which employs paper currency and electronic storage of money in bank accounts to save and grow with interest. However, the foundation of the two-tier system was first shaken by reforms in digital retail payments, such as M-PESA in Kenya. (Dr. Bejoy Das Gupta, 2022). These reforms transformed the way monetary transactions were undertaken.

However, long before M-PESA was launched in 2007, few systems were already in place that laid the foundation for the need for digital currency.

The “Digicash”:

In 1983, David Chaum published a research paper, “Blind Signatures for Untraceable Payments" which emphasized the idea of untraceable digital payments with an analogy to physical transactions. He was the first to give the idea of a digital blind signature for secure payments online.

As per his research paper, the idea was to maintain anonymity between sender and receiver by providing a common platform for the transaction. However, he also proposed that the payment platform shall refrain from knowing the details of payments.

This sparked the idea of how digital payments could be undertaken safely. Later in the year 1989, David founded “DIGICASH”, which is the currency and also the company he formed. Digicash was the earliest footprint of digital cryptography and laid the foundation for blockchain development in the early 2000’s.

A member of the Cyberpunk Community, David was also supported by other fellow members of the community who worked together on the concept of digital transactions. Traces of the same could be found in “Cypherpunk’s Manifesto” written by Eric Hughes in 1992, who was the group's prime founder.

Hashcash:

Predecessor of Bitcoin and devised by Adam Black, hashcash put forward the technique to limit online spam via emails and denial-of-service attacks. Its algorithm laid the foundation of the bitcoin mining algorithm, which presents raw information into systematic trends and patterns.

Although predominantly used in bitcoin, mining algorithm has also established the roots of digital currency.

M-PESA:

Mobile operator service called “Safaricom”, one of the first digital payment platforms, was launched on 6th march 2007 in Kenya. Kenyan associate of Vodafone, Safaricom, M-PESA was implemented to digitize and ease the process of financial interactions among the population.

Bitcoin:

Presently, around 105 countries are exploring opportunities in Digital currency, and that has all been made possible due to the popularity of Bitcoin. When one of the first digital payment platforms was released in Kenya, the development of Bitcoin can also be seen parallelly. On 3rd January 2009, bitcoin was launched by Nakamoto. The currency is the first successful successor of cryptocurrency. Despite the hardships in the initial stages, the currency has been adopted widely, unlike its predecessors.

However, this decentralized currency has been banned and explicitly used in a few countries due to data gaps and asset insecurity.

Fast forward from Bitcoin, many nations began their research expedition in the arena, and many pilot projects were launched on trial. Finally, after successful trials, a few nations have a fully functional digital currency, and one such project was the “Sand Dollar” in the Bahamas.

Project Sand Dollar:

The government of the Bahamas, in December 2019, launched their pilot currency on the island of Exuma. The project Sand Dollar then achieved major success, and in the year 2020, in the fall season, Bahamas became the first nation to implement nationwide digital currency successfully. The currency aimed to prevent digital scams and financial inclusions.

This was the defining moment in the history of Digital Currency. Other nations soon after initiated Research and development on the currency. At the same time, other nations, such as the United Arab Emirates and Saudi Arabia, jointly launched a project that confirmed that inter-border transactions could be successfully undertaken via decentralized ledger system based on Project Jasper's findings (undertaken by the bank of Canada).

Why bother about digital Currency:

What is the need to implement digital currency, and why are governments running towards the solution?

Well, the answer is simple. Every government aims to control the dynamics of the market for its consumers. Via centre-owned digital currency, the government competes directly with the domestic payment market, prohibiting and abolishing every market monopoly pre-established by local systems.

The other advantage of owning a digital currency is the providing financial inclusion for the populous. With the existing monetary system, people without bank accounts cannot transact digitally. Digital currency aims at providing inclusivity to them.

Another advantage that the masses will share will be fast and smoother transactions. Currently, international transactions are costly, and payments are delayed due to the “off-hours” of the bank. However, these issues are tackled by unified digital currency that will facilitate swift payments at reduced costs and smoothen the government's fund transfer process, such as Tax returns.

Conclusion:

Digital Currency is a win-win situation for the government and citizens if used within its limit. Otherwise, the currency also poses the threats of digital fraud and fumbling national security. The money in the account will not be posed to any interest rate for the consumers and will merely act as a digital wallet for the money, which is very likely prone to Cyber-attacks. To successfully implement CBDC, strict safety measures must be taken to safeguard it so that every citizen can relish the benefits of digital currency in tranquillity.

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