Digital Currency PDF

DIGITAL CURRENCY Presented by: Samarth Verma 22BC087 Divya 22BC275 Aryan Gupta 22BC282 Drishti Sethi 22BC373 Kajal Kumari 22BC571  TABLE OF CONTENTS INTRODUCTION OF DIFFERENT CURRENCIES WHAT IS CBDC CASE STUDY CRYPTOCURRENCY AND DEFI PLATFORMS REGULATORY CHALLENGES CURR...

DIGITAL CURRENCY Presented by: Samarth Verma 22BC087 Divya 22BC275 Aryan Gupta 22BC282 Drishti Sethi 22BC373 Kajal Kumari 22BC571  TABLE OF CONTENTS INTRODUCTION OF DIFFERENT CURRENCIES WHAT IS CBDC CASE STUDY CRYPTOCURRENCY AND DEFI PLATFORMS REGULATORY CHALLENGES CURRENT GLOBAL APPROACHES TO CRYPTOCURRENCY IMPLICATIONS FOR THE GLOBAL FINANCIAL SYSTEMS FUTURE OUTLOOK CONCLUSION Digital currencies are forms of money that exist only in electronic form and are not tangible like paper money or coins. They can be used for transactions between individuals or businesses over the internet or electronic networks. There are various types of digital currencies: 1. Cryptocurrencies: Decentralized digital currencies that use blockchain technology for security and transparency. Examples include Bitcoin, Ethereum, and Ripple. They are not controlled by any central authority, like a government or central bank. 2. Central Bank Digital Currencies (CBDCs): These are digital currencies issued and regulated by a nation's central bank. They represent the digital form of a country's official currency. Unlike cryptocurrencies, they are centralized. 3. Virtual Currencies: Digital currencies that are typically used within specific online communities or ecosystems, such as in gaming environments or online services. They may or may not be backed by real-world assets. 4. Stablecoins: A form of cryptocurrency that is pegged to a stable asset like a fiat currency (USD) or a commodity like gold. Examples include USDT (Tether) and USDC. Their aim is to minimize the price volatility typical of cryptocurrencies.  Overview of the underlying technology 1 2 3 4 5 BLOCKCHAIN CRYPTOGRAPHY CONSENSUS CENTRALIZED SMART CONTRACTS DATABASES (FOR MECHANISMS CBDCS) Used in most cryptocurrencies This ensures transaction Automated contracts Used to validate transactions. Central Bank Digital (e.g., Bitcoin), blockchain is a security. Public and that self-execute when Examples include Proof of Work Currencies (CBDCs) use decentralized ledger that private keys are used to certain conditions are (PoW) (e.g., Bitcoin) and Proof of traditional databases records transactions in a secure, send and receive digital met. These are widely Stake (PoS) (e.g., Ethereum 2.0). controlled by a central transparent, and immutable currencies. Hashing and used on platforms like encryption safeguard Ethereum. authority, like a central bank, way. Each transaction is grouped data and verify the rather than decentralized into a "block" and linked to authenticity of blockchains. others, forming a chain. The system operates without a transactions. central authority. THE ROLE OF DIGITAL CURRENCIES IN THE GLOBAL FINANCIAL ECOSYSTEM Digital currencies are increasingly becoming a crucial part of the global financial ecosystem, with several key roles and implications: Facilitating Transactions: Digital currencies enable faster, cheaper, and more efficient cross-border transactions compared to 01 traditional banking methods. They can reduce the reliance on intermediaries, which often leads to lower fees and shorter settlement times. Financial Inclusion: Digital currencies can enhance financial inclusion by providing access to financial services for unbanked 02 populations. People without traditional bank accounts can use digital wallets to store and transact money, thus participating in the global economy. Store of Value and Speculation: Some digital currencies, particularly cryptocurrencies like Bitcoin, are viewed as a store of 03 value and a hedge against inflation. This speculative aspect can attract investors but also adds volatility to financial markets. 04 Regulatory Challenges: The rise of digital currencies presents regulatory challenges. Governments are grappling with how to regulate these assets to prevent fraud, money laundering, and other illegal activities while fostering innovation. 05 Global Economic Impact: Digital currencies can impact global economic dynamics by altering how trade is conducted and how currencies are valued. They may challenge the dominance of traditional currencies, like the US dollar, in international trade. According to RBI, "A CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different". In other words, digital currency is a digitised or virtual version of domestic currency that is equal to physical cash. CBDC, though a virtual or digital currency, differs from private cryptocurrencies in that it satisfies a key requirement of the definition of a currency being backed and issued by a central bank. CBDC is the same as money issued by a central bank, except it doesn't come in paper form (or polymer). It is a sovereign currency in electronic form and would appear as a liability (currency in circulation) on the balance sheet of the central bank of India.  FROM UPI UPI is a real-time payment system that transfers money from one account to another instantly. It is not a digital rupee, but a facilitator of transactions. CBDC or e-Rupee is akin to sovereign paper currency. A wallet is loaded with e-Rupee which can then be transferred to another wallet. UPI transactions happen between bank accounts, and hence they are dependent on banks, the National Payments Corporation of India (NPCI) and payment service providers (PSPs). When a payer makes a UPI payment to a payee, the transaction flow involves the NPCI, payer bank, payee bank, payer PSP and payee PSP. FROM CRYPTOCURRENCIES Cryptocurrencies and CBDCs are both blockchain-based digital currencies. However, cryptocurrencies are generally run by private companies or individuals. On the other hand, a CBDC is controlled and tracked by a country’s central bank and corresponds to that country’s fiat currency. It is the direct liability of the Central Bank just as paper currency. CBDC INITIATIVE IN INDIA In December 2022, the RBI launched the pilot for retail e-Rupee. This pilot was launched with the aim of creating a digital version that is similar to paper currency and gauge usage for ensuring a seamless transition to CBDC. As of February 2023, this pilot project was being conducted in five cities within closed user groups comprising merchants and customers on an invitation- basis only. Under this project, the RBI issues CBDCs to intermediary banks that issue digital wallets to the end users. Transactions will be performed in the same way as those involving physical currency. While the e-Rupee will not earn any interest, it can be converted into deposits. Some features of CBDC includes: offline functionality to support usage of CBDC in low/no network conditions interoperability for enabling both newer and legacy payment systems to operate seamlessly and improve the likelihood of adoption anonymity to guarantee an individual’s right to privacy as in the case of physical cash  Wholesale CBDCs would primarily be Retail CBDCs would primarily be utilized utilized by financial institutions such as Lorem ipsum dolor sit amet, by individuals. People could use them banks. The consectetur useelit.of adipiscing CBDCs would allow Duis essentially as digital cash, with the banksnulla vulputate to at make payments in a quicker ante rhoncus, vel efficitur felis condimentum. comfort of knowing that the currency is and moreProin odioautomated manner. Cross- odio. issued and backed by the country’s border transactions may become faster central bank. and more reliable.  In October 2020, The Bahamas launched the world’s first central bank digital currency (CBDC), the SandDollar. The SandDollar is a digital representation of the Bahamian dollar, with the same rights as banknotes or coins, designed to be used on mobile wallet platforms. Unlike cryptocurrencies, which are stored-value digital assets, the SandDollar is true legal tender, its stability and value backed by foreign reserves. Residents can access their digital SandDollar-enabled wallet either via a mobile device or using a physical payment card, although the latter is less frequent in practice. Three wallet categories exist. Basic (Tier One) wallets have a $500 holding limit and a $1,500 monthly transaction limit, and users do not need to go through any consumer due diligence processes. Premium (Tier Two) wallets have an $8,000 holding limit and a $10,000 monthly transaction limit, and users require risk-based identity checks. Business (Tier Three) wallets are designed for merchants, with transaction limits set on a case-by-case basis. Transactions are validated almost instantaneously, and there are no fees or transaction costs for the consumer. The payments system uses multi-factored authentication, high level encryption protocols, and enhanced KYC/AML standards. As SandDollar is built on a blockchain-based platform, each transaction is irrefutable and traceable. Currently, $1.4 million of the currency is in circulation, up 30% from 2022, but still representing under 1% of currency in circulation. There are over 100,000 registered wallets, equivalent to about 25% of the population. There are 1,800 registered merchants, and 9 SandDollar authorized financial institutions.  Cryptocurrency Origin/Introduction Primary Use Market Position Launched in 2009 Originally designed as an alternative Dominates over 90% of the non- Bitcoin by Satoshi to traditional currency, now mainly a smart contract cryptocurrency Nakamoto store of value ("digital gold") market Controls 50% of the smart Supports smart contracts and Created in 2015 by contract cryptocurrency market; Ethereum decentralized applications (dApps); Vitalik Buterin facing competition from Binance backbone for DeFi, NFTs, and more Smart Chain and Solana Varying uses: utility tokens, niche Serve speculative and niche Various (e.g., purposes, or speculative investments Emerging Altcoins purposes, potential to grow as Dogecoin in 2013) (e.g., Dogecoin's popularity from Elon technologies evolve Musk's endorsement)  DEFI PLATFORMS: HOW THEY WORK AND THEIR MARKET POTENTIAL DEFI (DECENTRALIZED FINANCE) REFERS TO BLOCKCHAIN-BASED FINANCIAL SERVICES THAT FUNCTION WITHOUT INTERMEDIARIES, SUCH AS BANKS OR BROKERS. BUILT ON SMART CONTRACTS, DEFI PLATFORMS ALLOW USERS TO DECENTRALIZED EXCHANGES (DEXS) ALLOW USERS TO TRADE PERFORM FINANCIAL ACTIVITIES LIKE BORROWING, LENDING, AND TOKENS DIRECTLY WITHOUT A CENTRALIZED AUTHORITY, WITH TRADING THROUGH AUTOMATED PROTOCOLS ON THE BLOCKCHAIN. EXAMPLES LIKE UNISWAP AND SUSHISWAP LEADING THE SPACE. BORROWING AND LENDING PLATFORMS, LIKE AAVE AND COMPOUND, ALLOW USERS TO BORROW CRYPTO ASSETS BY YIELD FARMING IS ANOTHER POPULAR DEFI ACTIVITY, WHERE PUTTING UP OTHER ASSETS AS COLLATERAL. THE SYSTEM USERS PROVIDE LIQUIDITY TO POOLS AND EARN REWARDS, AUTOMATICALLY LIQUIDATES ASSETS IF THE COLLATERAL VALUE MAXIMIZING RETURNS THROUGH HIGH-LEVERAGE STRATEGIES. FALLS BELOW A CERTAIN THRESHOLD. - DeFi's growth has been explosive: The Total Value Locked (TVL) in DeFi protocols soared MARKET from $18 billion at the start of 2021 to $177 billion by early 2022. - Ethereum is the primary platform for DeFi, but due to high transaction fees ("gas fees"), other blockchains like Binance Smart Chain, Solana, and Avalanche are gaining market share. - DeFi platforms are expanding into areas like stablecoins, NFTs, and financial derivatives, reflecting massive future potential.  DISRUPTIVE POTENTIAL OF CRYPTOCURRENCIES AND DEFI ON TRADITIONAL FINANCE) DECENTRALIZATION - TRUSTLESS SYSTEMS - BLOCKCHAIN TRANSPARENCY Peer-to-Peer (P2P) Transactions Alternative to Fiat Currencies Decentralized Lending and Borrowing - Stablecoins: Cryptocurrencies like Tether (USDT) and USD Coin - Cryptocurrencies like Bitcoin allow for direct Decentralized Finance (DeFi) platforms like Aave, (USDC) are pegged to fiat currencies like the US dollar, transfers of value between parties, bypassing the Compound, and MakerDAO enable lending and providing a stable medium of exchange while leveraging need for banks or third-party payment processors. borrowing without involving traditional banks. blockchain technology for faster transactions. - Impact: Banks traditionally charge high fees for Instead, smart contracts facilitate the process. - Impact: Central banks face competition as stablecoins offer cross-border payments and remittances. Lower interest rates for borrowers, higher returns for an alternative for those who seek stability but want to avoid Cryptocurrencies eliminate these intermediaries, lenders (compared to traditional savings accounts), and traditional financial institutions for transactions. offering cheaper and faster alternatives for no intermediaries. international money transfers. Decentralized Borrowing Borrowing in DeFi is permissionless, meaning anyone can access funds without needing to pass through Investment and Asset Management* Tokenization of Real-World Assets EFFECTS ON lengthy credit approval processes. DeFi allows for the creation of digital tokens that represent ownership of real-world assets such as TRADITIONAL BANKING Decentralized Exchanges (DEXs) Disintermediation of Trading real estate, stocks, or even commodities. Decentralized Exchanges (DEXs) like Uniswap and Impact: Access to high-value assets Synthetic Assets Disruptive Impact on Payment Systems SushiSwap operate without central authorities, DeFi platforms like Synthetix offer users the ability -Crypto-Based Payment: Cryptocurrencies such as Bitcoin, allowing users to trade directly with one another. to trade synthetic versions of traditional assets Ethereum, and stablecoins like USDT are increasingly being Automated Market Makers (AMMs) (e.g., stocks, commodities) without actually owning used for everyday payments, remittances, and online AMMs like those used in Uniswap automate liquidity the physical asset. transactions. provision by allowing users to contribute to liquidity Impact: Challenges traditional brokerage firms and Lower fees, faster settlement times pools. This reduces the reliance on traditional order- stock exchanges book-based trading and creates continuous liquidity -Global Financial Inclusion:: DeFi and Cryptocurrencies are helping to provide financial services to billions of unbanked or for traders. underbanked individuals globally.  Regulatory Challenges in Digital Currency ANTI-MONEY LAUNDERING (AML) CONSUMER PROTECTION TAX EVASION & MARKET MANIPULATION Cryptocurrencies can be used The main challenge being risks Key challenge : Difficulty in tracking for illegal activities like money faced by investors from fraud, crypto income for taxes, and markets laundering. scams, and high volatility. are prone to manipulation. In 2021, $8.6 billion in Over $1 billion was lost to According to a report by (IRS) cryptocurrency was laundered, a cryptocurrency-related fraud in Cryptocurrency tax evasion costs 30% increase from 2020 2022 (FTC report). the U.S. government an estimated (Chainalysis report). as a response to which stricter $50 billion annually. as a response to which: regulations on disclosures, risk as a response India has imposed Exchanges are required to warnings, and safeguarding investor 30% tax on crypto gains and 1% TDS comply with AML laws and report funds are being emphasized upon. to monitor transactions. suspicious activities.  Current Global Approaches to Cryptocurrency Regulation LET'S WORK TOGETHER UNITED STATES EUROPEAN UNION CHINA Regulatory Bodies: The Markets in Crypto-Assets Regulatory Approach: China has The Securities and Exchange (MiCA) regulation aims to harmonize implemented an outright ban on Commission (SEC) regulates regulations across EU member cryptocurrency mining & trading to cryptocurrencies, classifying states, focusing on consumer mitigate financial risk and promote certain tokens as securities and protection and market integrity. its Central Bank Digital Currency. enforcing compliance. The Internal Revenue Service MiCA was approved on 20 April 2023 The Digital Yuan is China's official EMAIL WEBSITE (IRS) treats cryptocurrencies as & is expected to come into effect digital currency, issued by the www.reallygreatsite.com taxable property, requiring by December 2024, central bank to facilitate electronic capital gains to be reported. payments and enhance the In 2024, the SEC ramped up its According to a 2022 EU Commission efficiency of the financial system. enforcement, imposing $4.68 report, approximately 80% of billion in fines, a 3,018% increase European crypto businesses are Impact: In 2021, the ban led to a 75% from 2023. (IBtimes) operating without specific drop in Bitcoin mining activity in regulations. China.  India’s Approach to Digital Currency Regulation & Adoption 1 2 3 4 5 REGULATORY STANCE DIGITAL RUPEE CRYPTOCURRENCY LEGISLATIVE DIGITAL CURRENCY TAXATION DISCUSSIONS ADOPTION 2018: RBI banned banks from The RBI launched a pilot In 2022, India introduced India is rapidly adopting digital providing services for The Indian government is for the Digital Rupee a 30% tax on currencies, with the number of cryptocurrency transactions. considering a Cryptocurrency (CBDC) in late 2022. cryptocurrency gains and cryptocurrency users 2020: The Supreme Court Regulation Bill that could either a 1% TDS on transactions increasing from 7.5 million in overturned this ban, allowing regulate or ban private Key objectives: Improve above a threshold. 2020 to over 20 million in crypto activities, but there is still cryptocurrencies. financial inclusion, reduce 2022. no comprehensive regulatory reliance on cash, and While not regulatory framework in place. Concerns include money enhance payment approval, this tax The market capitalization of The government continues to laundering, terrorist financing, and efficiency. framework provides clarity cryptocurrencies in India debate between imposing a new maintaining financial stability. on how crypto profits are reached approximately $30 ban or creating a regulated taxed. billion by mid-2023, reflecting framework. growing interest among investors  Implications for the Global Financial System The implications of digital currencies for the global financial system are profound, presenting both significant risks and opportunities. Impact on Traditional Banking Payment Systems Cross-Border Payments Role of Central Banks Central Bank Digital Currencies Faster Transactions: Digital Cost Reduction: Digital currencies (CBDCs): Many central banks are currencies enable transactions can lower transaction costs by up exploring CBDCs to modernize to be processed in minutes, to 90% compared to traditional monetary systems. compared to days with methods. traditional banking. Control Over Monetary Policy: Speed Improvement: Real-time CBDCs provide a secure 24/7 Availability: Transactions settlements enhance efficiency in alternative to cash, helping central can occur anytime, eliminating international trade and banks retain authority in a digital the constraints of banking remittances. economy.. hours.  Risks Opportunities VOLATILITY FINANCIAL INCLUSION Cryptocurrencies are known for significant Digital currencies can bridge gaps in ITY price fluctuations. access to financial services. Impact: This volatility undermines their Impact: They reduce barriers such as high effectiveness as a stable store of value. transaction costs and stringent identity RTUN verification. CYBERSECURITY CONCERNS RISK Increasing digitization exposes the financial LOWER TRANSACTION FEES system to cyberattacks. Digital currencies can significantly reduce Impact: Cyber incidents can disrupt critical transaction fees compared to traditional OPPO services and erode trust in the financial banking services. system. Impact: This is particularly advantageous for cross- border payments and FINANCIAL STABILITY remittances. The interconnectedness of financial institutions means that a cyber incident FASTER PAYMENTS can have widespread effects. Real-time transactions enhance liquidity Impact: Successful attacks can lead to and operational efficiency. operational disruptions and economic Impact: Instant payments improve cash fallout, including bank runs. flow for businesses and consumers alike.  Future Outlook Monetary Policy Global Trade Cross-Border Transformation Dynamics Finance Evolution Direct Influence: CBDCs Simplified Payment Processes: Smoother Capital Flows: As provide central banks with a Digital currencies can revolutionize digital currencies gain direct means to influence global trade by enabling instant acceptance, they can facilitate money supply and interest cross-border payments without smoother capital flows across rates. intermediaries. borders. Enhanced Effectiveness: Cost Reduction: This simplification New Financial Products: They can improve the can significantly lower transaction This evolution may lead to transmission mechanisms of costs, enhancing liquidity for innovative financial products monetary policy, allowing for businesses. tailored for international more precise control over markets. liquidity.  CONCLUSION Digital currencies represent a transformative shift in the global financial ecosystem. From the rise of cryptocurrencies like Bitcoin and Ethereum to the development of Central Bank Digital Currencies (CBDCs), digital currencies are paving the way for faster, more efficient transactions. They offer numerous advantages such as reduced transaction fees, enhanced financial inclusion, and real-time processing. However, challenges such as regulatory uncertainties, market volatility, and cybersecurity risks remain. Governments and financial institutions are actively exploring ways to regulate and integrate digital currencies while safeguarding financial stability. As digital currencies continue to evolve, they will play a critical role in shaping the future of finance, influencing monetary policy, global trade, and financial inclusion. The potential for innovation is immense, but careful consideration of risks is essential to ensure a secure and equitable financial system for all. References MAKAROV, I., & SCHOAR, A. (2022). CRYPTOCURRENCIES AND DECENTRALIZED FINANCE (DEFI). BROOKINGS PAPERS ON ECONOMIC ACTIVITY, 2022(1), 141-215. 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