Digital or Traditional Currency, Which will Dominate in the Coming Days?

As the world is modernizing every day, the demand for new currency is also strengthening, and to complement the advancement, Digital Currencies were introduced. The digital currency gained popularity after the emergence of Bitcoin (BTC) and Ethereum (ETH); these currencies are called cryptocurrencies and are decentralized. Central Bank considers cryptocurrency illegal, whereas many countries like El Salvador and the Central African Public have legalized cryptocurrency. Though bitcoins are relevant for purchasing goods in USA and Canada, it still has no uniform law or any other regulations.

To cope with the global economic crisis and to tumble the traditional way of transaction gradually, Central Banks have introduced Central Bank Digital Currency (CBDC), a legalized and generalized currency for transactions.

Background of Digital Currency

The introduction of digital currency took place way back in 1989 during the "Cyberpunk Movement of the 80s." A cryptographer named David Chaum first invented "DigiCash," but Chaum's company went bankrupt. In 2008, Satoshi Nakamoto (a pseudonymous name) distributed a paper called "Bitcoin: A Peer-to-Peer Electronic Cash System" because he felt that banks and financial institutions were redundant, and started bitcoin. Bitcoin works on the SHA-256 hash algorithm, and to mine bitcoin, one must solve complex mathematical equations; this is also known as mining. Unauthorized and unregistered bitcoins began circulating, but by 2013, Bitcoin gained momentum and exploded, floating at $754.01.

What is Traditional Currency?

We are all familiar with the ancient traditional form of payment that involves notes and coins, which primarily deals with physical currency. While this pre-existing payment method is still prevalent, it is gradually being replaced by e-payment systems. However, many third-world countries are still dependent on traditional payment methods. Several African countries, for example, still lack access to modern gadgets, hindering their adoption of digital payments.

What is Cryptocurrency?

Cryptocurrency is a currency that exists solely online and has no physical form. Cryptocurrencies are an alternative to physical money and can be generated through various encryption algorithms. Unlike fiat currencies, cryptocurrencies are not backed by central banks and do not require intermediaries such as banks or financial institutions to validate transactions. Instead, they rely on blockchain technology for support.

What is E-Payment ?

E-payment is now an emerging payment method that has already established a strong stance in India. In the previous two years, around 46 percent of transactions in India have taken place via digital payment methods. E-payments include QR code payments and money transfers through a contact number.

What is Digital Currency?

Now Digital Currency is similar to Cryptocurrency; the only difference is they are legalized and backed by the central bank. Many countries have their personalized digital currency registered under CBDC. Hence, they’re recognized globally and are exchangeable to fiat currencies.

Draw Backs of Traditional Method

• Involves multiple intermediaries

• Risky to manage and highly exposed to theft

• Involves a lot of paperwork in authorization and verification.

• Has Processing cost.

• Risks of Counterfeiting

Draw Backs of Digitalized Payment

• Technical Issues may rise

• Vulnerable and prone to cyber-attacks

• Difficult to understand

• Additional privacy and security concerns

Why Cryptocurrencies are not an alternative to Digital Currency?

• Cryptocurrencies are highly encrypted, and this feature enables offenders to purchase weapons.

• Cryptocurrencies lack proper security, as they’re available digitally only they’re exposed to scammers.

• To counter terrorism, Cryptocurrencies are highly encrypted hence they’re the most preferred currency for terrorists to buy weapons, and the introduction of digital currency would assist in maintaining records.

Will the Digital Money Replace Traditional Methods of Payment?

Although the utilization of Digital money is arbitrary, it would take decades for Digital Currency to take over the traditional payment method. Digital currencies are gradually popularizing, but the advent is to be delayed. Various factors will cause hindrances in normalizing digital money; these factors are:

Financial literacy: Financial literacy is essential for understanding digital currency, as it requires a great deal of digital automation and various programming languages. To achieve widespread adoption of digital currency, governments must ensure that their populations are fully literate in these technologies. This is particularly important as many technical gadgets, such as smartphones and computers, are primarily designed for English speakers. However, translation interfaces are available to help overcome language barriers.

Third World Country: The expansion of digital currency is still in its infancy, many third-world countries are still not advanced enough to adopt digital currencies, and there are forbidden regions still lacking basic infrastructure such as electricity, internet, and electric gadgets.

Diplomacy: Another major issue is Currency Corporation, Central Bank Digital Currency (CBDC) has established Dollar as a parameter for Digital currency, and for some nations competing against US currency is impossible or just a mere dream. Leading global economies giants Japan, China, the US, Canada, Switzerland, Sweden, the UK, and European Central banks are working collaboratively on Central digital currency.

RBI’s Digital Rupee

India has already launched the pilot of its central bank digital currency (CBDC), called eINR or E-Rupee. E-Rupee is exchangeable to Indian currency and recognized by CBDC, making it legalized and centralized, unlike other cryptocurrencies such as Bitcoin and Ethereum. The digital rupee is a legal tender dissimilar to its other competitors' bitcoin and other cryptocurrencies; RBI's digital currency is exchangeable to fiat currency and can be used to buy products and withdraw cash.

According to the RBI, it costs the government around INR 15-17 to print an INR 100 note, which has a lifespan of four years. Additionally, printing and circulating notes nationwide costs thousands of crores. In the 2021-22 financial year, the RBI printed an additional 4.19 lakh notes, which cost ₹4,984.8 crores. The introduction of the digital rupee would minimize extravagant spending on currency printing and reduce the risks of counterfeiting.

Conclusion

Digitalizing currency can be the utopian dream of the government, at the same time, it can be a 'War on Cash,' although it depends on what foundation the government is implementing the idea of digitalization of currency. According to UN Data, there are still around 46 least-developed countries (LDCs) in the world that are still looking for basic infrastructure, special technical assistance, and technological aid. As long as these economic crises prevail, the digitalization of the currency will prolong. The adaptation of digital currency for third-world countries is paradoxical yet In India, UPI payment has achieved new horizons in a short period. India ranks first with the most real-time transactions in the world.

Another aspect of digital currency is that during the pandemic, circulating and exchanging paper money and coins was forbidden as there were no physical contacts, and people opted for online cash rather than cash as they were confined to their houses.