CBDC

1. Meaning and place in the financial system

A CBDC is a digital form of a country’s sovereign currency, denominated in its national unit of account and issued by its central bank. It combines the monetary character of central bank money with electronic transferability. It is not merely a digital representation of a bank deposit. In India, the digital rupee is issued by the RBI and represents a direct liability of the RBI, just as an RBI-issued banknote does.

Modern monetary systems contain both central bank money and commercial bank money. Currency held by the public and reserve balances maintained by banks with the central bank are forms of central bank money. A household’s savings account, however, is a liability of its commercial bank. When that household pays using an ordinary bank-account-linked UPI transaction, it transfers commercial bank money rather than acquiring a new form of sovereign currency.

The e₹ serves as a medium of exchange, unit of account and store of value. Its value is equal to the physical rupee: one digital rupee equals one rupee. It is not a new currency with a separate exchange rate. It is also not inherently protected against inflation; its purchasing power changes with the purchasing power of the rupee.

• CBDC is money; UPI is a payment interface and infrastructure for transferring money.
• A bank deposit is a claim on a commercial bank; CBDC is a claim on the central bank.
• Private cryptocurrencies are not RBI liabilities. Stablecoins also remain distinct from sovereign CBDC, even when designed to maintain a fixed value.

2. Types and design choices

CBDCs are commonly classified as retail or wholesale. Retail CBDC is designed for individuals and businesses to make everyday payments. Wholesale CBDC is designed for restricted access by financial institutions, particularly for interbank settlement, securities transactions and potentially cross-border payments. These categories describe access and use; they do not prescribe a single technological architecture.

A token-based CBDC requires verification of the authenticity of the token and the holder’s ability to transfer it. An account-based CBDC verifies the identity of the account holder and records the resulting balance changes. RBI’s October 2022 Concept Note regarded a token-based approach as preferable for retail CBDC and an account-based approach as potentially suitable for wholesale CBDC. India’s retail pilot uses digital tokens representing legal tender.

Issuance and distribution can also be organised differently. Under a direct model, the central bank handles both issuance and customer-facing services. Under an intermediated model, banks or other authorised entities distribute CBDC and provide user services while the currency remains a central bank liability. India’s retail pilot follows a two-tier arrangement involving participating banks. Intermediation does not convert e₹ into a bank deposit.

CBDC can use centralised databases, distributed ledgers or combinations of technologies. Blockchain, mining and a decentralised consensus mechanism are not defining requirements. Other design choices include interest payment, holding limits, transaction limits, offline capability and privacy safeguards. These choices affect adoption, financial stability and operational resilience.

3. India’s legal framework and pilots

The Union Budget 2022–23 announced the introduction of a digital rupee. The Finance Act, 2022 amended the RBI Act, 1934, including the definition of a banknote to cover physical and digital forms. The RBI subsequently published its Concept Note on CBDC in October 2022. These developments provided the legal and policy foundation for testing e₹.

The wholesale pilot, e₹-W, commenced on 1 November 2022. Its initial use case was settlement of secondary-market transactions in government securities. The objective was to test whether settlement in central bank money could reduce settlement risk and associated costs. It was a restricted financial-market pilot, not a digital wallet scheme for the general public.

The retail pilot, e₹-R, began on 1 December 2022 in a closed user group comprising participating customers and merchants. Its initial cities were Mumbai, New Delhi, Bengaluru and Bhubaneswar. Users could transact through digital wallets offered by participating banks, with person-to-person and person-to-merchant payments supported. The e₹ does not earn interest and can be converted into other forms of money, including bank deposits.

RBI subsequently enabled interoperability between CBDC wallets and UPI QR codes, widening merchant acceptance without making CBDC and UPI identical. In February 2024, RBI announced the introduction of programmability and offline functionality in the retail pilot. These are evolving capabilities: an announcement or trial should not be interpreted as universal availability or replacement of cash.

4. Benefits and development applications

Retail CBDC can preserve public access to central bank money as payments become increasingly digital. It may complement cash and existing electronic payment systems, support competition and provide an additional payment option. Potential savings in printing, transportation and handling of physical currency must be weighed against expenditure on digital infrastructure, cybersecurity and customer support.

Offline functionality could support transactions where internet connectivity is unreliable, including remote rural areas. Programmability could allow specified funds to be used only for approved purposes, locations or periods, making it potentially useful for targeted benefits. These possibilities require safeguards: restrictions on spending may reduce user choice, while digital access alone does not guarantee inclusion.

Wholesale CBDC may improve settlement efficiency through delivery-versus-payment arrangements that link securities delivery with payment. Cross-border CBDC arrangements could reduce intermediary chains and transaction costs, but require cooperation on foreign exchange, legal recognition, compliance and technical standards. Faster technology cannot by itself remove jurisdictional or regulatory barriers.

5. Risks, safeguards and examination traps

Large shifts from bank deposits to CBDC could reduce banks’ stable funding and raise lending costs, a risk called bank disintermediation. During financial stress, rapid conversion into central bank money could accelerate deposit flight. Non-interest-bearing CBDC, appropriate holding limits and gradual implementation can mitigate these risks, although each safeguard involves trade-offs.

Privacy must be balanced with anti-money-laundering and counter-terrorist-financing obligations. Digital payments can create detailed transaction records, making data minimisation, restricted access and clear legal safeguards important. Cyberattacks, wallet compromise and system outages remain possible even though the issuer is the central bank. Offline designs also need protection against double spending, where the same digital value is spent more than once.

• Legal tender status does not mean that a nationwide rollout has replaced cash.
• CBDC issuance does not automatically increase money supply: conversion from cash or deposits may primarily change the composition of money holdings.
• No commercial bank credit risk does not mean no cyber, operational or fraud risk.
• Programmability is an optional design feature, not a defining characteristic of every CBDC.

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