Page 35 - Banking Finance October 2025

ARTICLE

Cryptocurrencies and Money mate the true costs associated with such a transition. Gaug-
ing the efficacy of monetary policy under such conditions is
A cryptocurrency like bitcoin is a cryptography-based soft-
another big challenge. Naturally, the official views on issu-
ware protocol that allows peer-to-peer transfer of "values"
without any financial intermediary such as banks. To be ing CBDCs in light of these uncertainties have been mixed
considered as a "currency" or even as a digital medium of so far.
payments like bank deposits, there has to be a "unit" and a
well-defined process of "issuance". The beauty of the Yet four-fifths of all central banks are said to be involved in
researching options for designing suitable CBDCs. Early on,
cryptocurrencies like Bitcoin is that its issuance process is
central bankers were hesitant but growing familiarity with
also part of the protocol. Although the original protocol of
the idea has helped. According to a report by the Bank for
Bitcoin has put a limit to its issuance in terms of number of
units, there is no inherent technical reason for enforcing International Settlements, central bankers around the
world are growing more optimistic about the eventual ef-
such a ceiling on issuance process. For example,
ficacy of CBDCs.
Ether, the second largest cryptocurrency by market cap, has
no such limit. This is not necessarily a handicap for Bitcoin, Central banks and governments have been paying close at-
as it can be divided into any number of smaller values. To- tention to these developments. The desirability of CBDCs is
day the smallest unit is called Satoshi, 100 million of which understandable in this context. But central banks, first need
to ensure the integrity of their networks to facilitate the
adds up to one bitcoin. However, a limit to issuance is a
gradual shift away from cash. Countries like China and The
desirable attribute for those who are ideologically opposed
to a state's power to issue a fiat currency without limit. Netherlands have already started experimenting with their
digital fiat albeit on a limited scale. Sweden is likely to fol-
Technologically, cryptocurrencies are based on four basic
low suit with its e-krona. A US Fed coin issued as the digital
technologies of which three have been known to the soft-
ware community for long: Public Key Cryptography, Consen- greenback is also thought to be on the cards and The Euro-
pean Central Bank (ECB) appears excited as well.
sus algorithm for a distributed peer-to-peer computer net-
work and one-way hash function. The fourth pillar of tech-
nology underlying cryptocurrencies is the Blockchain tech- Central banks increasingly look to draw on lessons offered
nology for keeping account of all payment transactions. by cryptocurrencies and private digital-payment systems.
They undoubtedly want to tap the efficiency gains and har-
ness the resilience of the technology. 'Permissioned' systems
Motivation behind CBDCs are expected to do away with the fully decentralized ones
A fully functional CBDC has never been implemented any- but still retain some of the latter's advantages. On the tech-
where, partly because of technological handicaps. Hence, nical front, so far, the main focus of central banks has been
given the absence of empirical data, it is difficult to esti- on reducing transaction costs and making the CBDC plat-
forms more programmable. The Dutch Central Bank (DNB),
especially, is embracing the need for anonymity that crypto-
enthusiasts adore. But the big question that lurks is whether
or not CBDCs can add reasonable value to the economy.

The shift from public fiat money to electronic and private
money has opened a plethora of opportunities. At the same
time, it has also posed challenges to the definition and tra-
ditional form of money, the role of central banks and finan-
cial intermediation model. Last year, Bank of England pub-
lished a discussion paper titled, "Central Bank Digital Cur-
rency (CBDC): Opportunities, Challenges, and Design", while
on the other side of the Atlantic, two Congressional Bills
pushed for 'Digital Dollars'. In the year 2022, Reserve Bank
of India, in one of its monthly bulletins published an article

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