Finance minister Nirmala Sitharaman on Tuesday announced that the Reserve Bank of India (RBI) will soon introduce digital currency based on blockchain technology.

“Digital currency will also lead to a more efficient and cheaper currency management system. It is therefore proposed to introduce a digital rupee using blockchain and other technologies, to be issued by the Reserve Bank of India, starting 2022-23,” the finance minister saidduring the Budget presentation.

Blockchain technology is the tech behind Bitcoin and other cryptocurrencies. Let’s find out what is blockchain and how it works:

What is blockchain technology and how it works

– Blockchain, also known as distributed ledger technology (DLT), can be seen as a public ledger that has copies spread out over multiple locations that are called nodes.

– Each node usually refers to individual computers with copies of the ledger. To sum up the basic definition: a blockchain is essentially a digital ledger that is duplicated and distributed among all the computer systems on the blockchain.

– When somebody adds new information to the ledger, it’s recorded in a group called a block. These blocks make up a chain of records, giving it the name blockchain. Once the data is recorded, it can’t be changed—you just have to keep adding new blocks.

– According to Euromoney, each block in the chain contains a number of transactions and every time a new transaction takes place on the chain it is registered to every participant’s ledger.

– This nature of transactions that are recorded over all the computers in the chain make it decentralised thus no single person can have complete control over the information in the record.

– If someone wants to make a change in the ledger, the change must first be verified by everyone on the blockchain network. This feature makes it difficult to be hacked.

– If hackers wanted to corrupt a blockchain system, they would have to change every block in the chain, across all of the distributed versions of the chain. With each new block in the chain its security becomes a little more tight to break into.

– Each transaction on the chain is visible to every participant of the network, thus making it a highly transparent system. However, nobody can know the real identity of another person.

What is digital currency?

Digital currencies, the best known use of blockchain, use it as a means of recording transactions.

Starting with the next fiscal year on 1 April, 2023, India will have its own digital currency which would essentially mirror the physical currency in digital form.

The currency, called ‘digital rupee’, will be issued by the Reserve Bank in digital form and will be fungible with physical currency.

The exact regulation governing this Central Bank Digital Currency (CBDC) is yet to be finalised.

CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies or cryptocurrency that have mushroomed over the last decade. Private virtual currencies do not represent any person’s debt or liabilities as there is no issuer. They are not money and certainly not currency.

The finance minister defined anything that hasn’t been issued by RBI as an asset and not a currency.