The CBDC Alternative

Bitcoin should not be treated as a currency. But at the same time it should not be banned. Cryptocurrencies are permissionless systems that operate without intermediaries. As a result central banks cannot implement macro-economic measures in the event of a financial crisis. However, they are programable and can be incorporated into smart contracts offering a number of opportunities for digital financial inclusion. CBDCs are the best of both worlds combining the programability of bitcoin with the stability of fiat currency.

This article was first published in The Mint. You can read the original at this link.

India has always viewed digital currencies with suspicion. In 2018, the Reserve Bank of India prohibited regulated entities from providing services to anyone who deals with or settles any virtual currencies, effectively banning bitcoin trading in the country. While the Supreme Court lifted this restriction in 2020, there were rumours, earlier this year, that a new law was in the works that would make it a crime to possess, issue, mine, trade or transfer crypto assets in India.

Banning Bitcoin

Whenever I speak to my banker friends about bitcoin, I am left with the impression that the very notion of a decentralised digital currency shakes them to their core.

They give me all sorts of arguments as to why it should be prohibited - usually starting with concern over the speculative nature of bitcoins and the fact that so many hapless souls have poured their live’s savings into holding as much of this digital currency as they can. As compelling as this argument might be, it might have carried more weight if not for the fact that almost everyone who has held on to their investments in cryptocurrencies is richer now than when they started. And then there is the law enforcement argument - the concern that cryptocurrencies make it hard to track illegal activities - an argument that trips over itself when you see how easily apparently anonymous bitcoin transactions were traced to Ross Ulbricht, the owner of the dark web’s most notorious (and now defunct) market place, Silk Road.

Truth be told, I don’t really think it is particularly helpful to think of bitcoin as a currency. One of the most important attributes of a currency is that it should be a stable store of value - and bitcoins are anything but. Instead, I believe it is more helpful to think of bitcoins as just another asset - the digital equivalent of a scarce commodity that, like gold, certain collectors prize. It is for this reason, above all else, that I believe no-one should be talking about banning bitcoin - any more than they should be looking to ban the collection of rare works of art or first-edition stamps.

But does cryptocurrency serve any purpose beyond being an exotic collectible for the digitally savvy? I believe it does but before we go into that allow me the indulgence of an explanation.

Permissioned and Permissionless

Our financial system relies on banks to record transactions - to keep track of how much money a person has and to whom she has transferred it. It is a “permissioned” ledger system in that only trusted intermediaries (registered banks under the supervision of the central bank) can make changes to the ledgers that certify that a given transaction has been completed.

When we embraced digitisation, it was these ledgers that we focused our digitising efforts on. In doing so we have attempted to provide account holders different ways in which to access the value stored in their accounts and the means to transfer it on anyone they wanted to on the fly. This is the logical path for digitisation in the developed world where nearly everyone is part of the formal financial sector. In a country where less than 50% of its citizens have bank accounts, we need other solutions.

Cryptocurrencies, are “permissionless” systems that need no intermediary. Instead of a centralised ledger, transactions are recorded on a distributed database through a system that updates each transaction on every instance of the ledger held by all the participants in the system. A purely permissionless system has no use for banks. All it needs is nodes to operate the blockchain - which is why it is a system well suited for countries, such as ours, where the bank network has failed to reach over half the population. Which explains the particular appeal of this system to those who believe our financial system is broken - as also the slightly irrational fear it evokes in bankers.

Real World Challenges

As appealing as a permissionless system sounds, it ignores the realities of the modern world. Central banks are not just intermediaries managing the great big financial ledger of the country - they are responsible for its financial health. To perform this function they need to be able to take money out of the system when required or add money back - such as countries around the world have had to do this past year to stimulate the economy. None of this is possible in a purely permissionless system as the distributed nature of the financial architecture makes any sort of central bank intervention impossible.

That said, a currency designed along the lines of bitcoin has many advantages that we should not ignore. Digitally native currencies are programmable and capable of being incorporated into smart contracts offering various opportunities for innovative digital solutions. Since they can be directly allotted to citizens who don’t have a bank account, they are ideal for financial inclusion - particularly in countries where bank networks are already stretched thin. Being digitally auditable, transactions can be audited reducing the opportunities for illicit activity. The challenge is how does one bring the best digital currencies have to offer into the traditional financial paradigm.


Many countries have been toying with the idea of a central bank digital currency (CBDC) - digital currency that functions as a digital representation of a country’s fiat currency. CBDCs are a completely reengineered form of money that use the distributed ledger as the underlying technology layer but which are backed by suitable amounts of monetary reserves just like normal fiat currency. They are run by central banks along a few select financial entities responsible for managing the distributed ledger. The best CBDCs will converge the best of both worlds — the programability and security of cryptocurrencies and the reserved-backed stability of fiat currency.

Several countries are already testing this concept. In 2020, the Bahamas introduced the Sand Dollar while in the same year the Riksbank in Sweden began testing its eKrona CBDC as a proof of concept. Many other central banks are seriously considering it, so much so that a survey by the Bank for International Settlements suggests that a full fifth of the world’s population may get access to a central bank digital currency in as little as three years. But by all accounts, the country that has made most progress is China - with much of the underlying infrastructure for its new digital currency, the DC/EP already built out.

It is well appreciated that India has already made great strides in payments - but the benefits of this only extend to those with bank accounts. The next logical step is for us to build a truly digital currency.

Banning technology has never made it go away. It’s time to shake off our irrational aversion to all things crypto and embrace the opportunities it has to offer. Let’s take the time and effort to understand it better and, having done so, do all we can to build the digital currency that our country needs.