Indian CBDC

CBDC Full form

Central Bank Digital Currency (CBDC)

CBDC Meaning

Central Bank Digital Currency (CBDC) is a digital form of currency notes issued by a central Bank. It will provide an additional option to the currently available forms of money. It is substantially not different from banknotes, but being digital it is likely to be easier, faster and cheaper.

CBDC in India is referred to as e₹ (digital Rupee).

CBDC retail pilot program/project launch date in India and for which cities? (CBDC-R)

December 1,2022 (in four cities : Mumbai, New Delhi, Bengaluru and Bhubaneswar)

CBDC wholesale pilot program/project launch date in India and for which Banks ?(CBDC-W)

October 31,2022 [Nine banks : State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, YES Bank, IDFC First Bank and HSBC) ]

CBDC Classification

CBDCs can be classified into two types:

(i) Wholesale CBDCs (CBDC-W)

(ii) Retail or general purpose CBDCs (CBDC-R)

What are Wholesale CBDCs (CBDC-W) ?

These are intended for restricted access by select financial institutions for settlement of interbank transfers and related wholesale transactions.

Wholesale CBDC has the potential to transform the settlement systems for financial transactions and make them more efficient and secure.

What are Retail or general purpose CBDCs (CBDC-R) ?

These are intended for use by general public, private sector, non-financial consumers and businesses for retail transactions.

CBDC primary functions

• Medium of exchange : Money as a medium of exchange may be used for any transactions wherein goods or services are purchased or sold.
• A store of value : Money can also be stored or conserved for future purposes.

CBDCs would appear as liability on a central bank’s balance sheet and will be used by general public for above two purposes.

Benefits of CBDC

• It would help in building trust, safety, liquidity, settlement finality and integrity.
• It would provide entrepreneurs a platform to create new products and services.
• It reduces settlement risk in the financial system.
• It would result in reduction in operational costs involved in physical cash management.
• It would help in fostering financial inclusion, bringing resilience, efficiency, and innovation in payments system.
• It would boost innovation in cross-border payments space and provide public with uses that any private virtual currencies can provide, without the associated risks.
• CBDC would diversify the range of payment options, particularly for e-commerce [where cash cannot be used, except for the Cash on Delivery (COD) option].
• The offline functionality as an option will allow CBDCs to be transacted without the internet and thus enable access in regions with poor or no internet connectivity.
• It shall also create digital footprints of the unbanked population in the financial system as offline, which shall facilitate the easy availability of credit to them.

Will CBDC work without Internet ?

As per RBI’s concept note on CBDC ,”the use of offline feature in CBDC would also be beneficial in remote locations and offer availability and resilience benefits when electrical power or mobile network is not available.”

This means Internet would be required only for transferring money from Bank to e₹ wallet and then payments could be made without internet from one e₹ wallet to another.

Difference between CBDC and cryptocurrency ? / How CBDC is different from cryptocurrency ?

The inherent design of cryptocurrencies is more geared to bypass the established and regulated intermediation and control arrangements that play a crucial role of ensuring integrity and stability of monetary and financial eco-system and has various risks associated with it.

A risk free central bank digital money which will provide the users the same experience of dealing in currency in digital form, without any risks associated with private cryptocurrencies.

Will CBDC offer interest like banks ? or why CBDC won’t offer interest like banks ?

As physical cash do not provide any interest, no interest would be provided on e₹ wallet.

If RBI starts providing interest, it would result in loss of deposits by banks as people would deposit money with RBI instead of banks as it doesn’t carry an risk, thus, impeding banks credit creation capacity in the economy.

Would CBDC transactions remain anonymous like cash ?

As digital transactions would leave some trail, it would be difficult to retain full anonymity for such transaction.

Reasonable anonymity for small value transactions akin to anonymity associated with physical cash may be a desirable option for CBDC-R but the potential for anonymous digital currency to facilitate shadow-economy and illegal transactions makes it highly unlikely that any CBDC would be designed to fully match the levels of anonymity and privacy currently available with physical cash.

How CBDC is different from money in banks ? or What is the difference between CBDC transactions and UPI payments ?

CBDC would be a liability of the Reserve Bank, and not of a commercial bank unlike payments or transactions done through banks or UPI.

Is CBDC only for small amounts?

No, any amount can be transferred by using CBDC.

How CBDC will affect the price of other cryptocurrencies?

Would CBDC have an effect on Current accounts with Banks ?

There is still a concern expressed in some quarters that there could be a possibility of shifting of some of the current accounts maintained by corporates and business entities with banks in favour of CBDC to gain access to central bank money.

But, RBI believes that as the current account is relationship based and their association with banks is a function of multiple services offered to them and thus it is anticipated that scale of bank intermediation will be low for such deposits.

CBDC e₹ Wallet Demo

Difference between CBDC and UPI explained by RBI Governor @DasShaktikanta
Source – @business_today pic.twitter.com/TJ95Sffhu8

— anshul gupta (@anshgupta64) December 7, 2022

(Source : twitter ID : anshgupta64)

(Source : Reserve Bank of India YouTube channel)

Type of CBDC Model used in India

In the “indirect CBDC” model, consumers would hold their CBDC in an account/ wallet with a bank, or service provider. The obligation to provide CBDC on demand would fall on the intermediary rather than the central bank. The central bank would track only the wholesale CBDC balances of the intermediaries. The central bank must ensure that the wholesale CBDC balances is identical with all the retail balances available with the retail customers.

(Above table source : Concept note on CBDC )

History of CBDC

In November 2017, a High Level Inter-ministerial committee was constituted under the chairmanship of the Secretary, Department of Economic Affairs (DEA) to examine the policy and legal framework for regulation of virtual / crypto currencies and recommend appropriate measures to address concerns arising from their use. The committee had recommended the introduction of CBDCs as a digital form of sovereign currency in India.

The Reserve Bank had set up an Internal Working Group (WG) in October 2020 to undertake a study on appropriate design/implementation architecture for introducing CBDCs in India. The WG in their February 2021 report made the following major recommendations:

• Need for a robust legal framework to back the issuance of e₹ (Digital Rupee) as another form of currency.
• The design of e₹ may be decided depending on the circumstances and the need of the country.
• Use of token-based variant in the retail segment. Undertaking some pilot projects with phased implementation to serve as a learning experience.
• Implementation of a specific purpose e₹, one each in the wholesale and retail segments to begin with. The Reserve Bank shall only issue and redeem e₹ while the distribution and payment services will be delegated to the banks.
• The need to conduct more research on the technological aspects of CBDC implementation on a national scale was recommended.
• The WG proposed to continue deliberations on CBDC over a longer period to refine and crystallise requirements for the implementation of other models of e₹ in future.

As per recommendations of the internal Working Group (WG) , RBI started exploring the option of implementation of account-based CBDC in Wholesale segment and token-based CBDC in Retail segment vide a graded approach.

Government of India announced the launch of the Digital Rupee — a Central Bank Digital Currency (CBDC) from FY 2022-23 onwards in the Union Budget placed in the Parliament on February 01, 2022.

The Government of India vide gazette notification dated March 30, 2022 notified the necessary amendments in the Reserve Bank of India Act, 1934, which enables running the pilot and subsequent issuance of CBDC.

Interesting facts about CBDC

• Across the globe, more than 60 central banks have expressed interest in CBDC.
• As of July 2022, there are 105 countries in the process of exploring CBDC, a number that covers 95% of global Gross Domestic Product (GDP).
• 10 countries have launched a CBDC, the first of which was the Bahamian Sand Dollar in 2020.
• Currently, 17 other countries, including major economies like China and South Korea, are in the pilot stage and preparing for possible launches.
• China was the first large economy to pilot a CBDC in April 2020 and it aims for widespread domestic use of the e-CNY by 2023.
• The total expenditure incurred on security printing during April 1, 2021 to March 31, 2022 was ₹4,984.80 crore as against ₹4,012.10 crore in the previous year (July 1, 2020 to March 31, 2021).CBDC reduces operational costs e.g. costs related to printing, storage, transportation and replacement of banknotes and costs associated with delay in reconciliation and settlement.
• Though, at the outset, establishing a CBDC creation/issuance may entail significant fixed infrastructure costs but subsequent marginal operating costs shall be very low. Further, given the geographical spread and pockets where making physical cash available is a challenge, CBDC is expected to facilitate seamless transactions.
• The percentage increase in value of banknotes during 2020-21 and 2021-22 was 16.8 per cent and 9.9 per cent respectively and the percentage increase in volume of banknotes during 2020-21 and 2021-22 was 7.2 per cent and 5.0 per cent respectively. (Source: RBI Annual Report for the year 2021-22) CBDCs would help in reducing the volume of banknotes.
• India is the world’s largest recipient of remittances as it received $87 billion in 2021 with the United States being the biggest source, accounting for over 20 per cent of these funds. CBDC would help to explore the use of CBDC for improvement in cross-border transactions.
• The annual financial inclusion-Index for India for March 2022 is 56.4 vis-à-vis 53.9 in March 2021. It shall make financial services more accessible to the unbanked and underbanked population.

Some points to be explored in future for CBDC-W

CBDC-W could also be explored for the following:

1. Wholesale market for asset classes which are OTC and bilaterally or settled outside CCP arrangements- CPs, CDs, etc.
2. Access to retail for buying assets such as G-secs, CPs/CDs, primary auctions etc bypassing the bank account route.
3. In case of g-secs, if assets are also tokenised, this could be extended to non-residents to investment in domestic asset classes.

Indian CBDC

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