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Central Bank Digital Currency (CBDC)

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Central Bank Digital currency (CBDC) is a legal tender (meaning recognized under law as a means of payment/settlement) and the Central bank’s liability in digital form appearing in its balance sheet. It has the backing of the Central Bank and the Sovereign. CBDC is a form of electronic currency which can be exchanged at par with similarly denominated cash and traditional deposit. It is another variant of the fiat money (currency) which central banks traditionally issue. It carries the same promise like a traditional currency note. For e.g. A INR 100 note bears a promise that this piece of paper is worth INR 100. The RBI issuing a CBDC would be equivalent to converting the entire INR in the economy to complete digital format backed and issued by the RBI being the monopoly supplier.

At present, access to central bank money is limited to commercial banks or such qualified financial institutions whose credits and debits are settled in the accounts of the central bank using the reserves kept with the central bank. The physical currency/cash is also a liability of the central bank held in retail form by general public. CBDC will be the third variant wherein the CBDC-using general public directly holds claims against central bank. This raises questions for commercial bank based intermediation and monetary policy administration.

CBDC can take two forms broadly;

a. Wholesale CBDC: This type of CBDC is used for interbank payments and held by financial institutions. One can say that such type of CBDC already has a loose existence in India.
b. Retail CBDC: This type of CBDC is for general public. It is a token which can exist alongside physical cash and commercial bank money.


India’s stand on CBDC:

RBI has in the past cautioned against the usage of crypto currencies in general [1]. However, taking note of the rapid development in the field of digital and crypto currencies, the RBI has stated that it is working on the need to introduce digital currency (CBDC) in India and if yes, the possible steps to operationalize the same [2].

In 2018, the RBI had banned commercial banks [3] from trading in crypto currencies as well as from facilitating the players from trading and exchanging crypto currencies. However, the Supreme Court of India quashed this ban in March 2020 [4] on grounds of the circular being unreasonable. Since then, crypto currency and crypto exchanges have been working in regulatory vacuum. Therefore, the 2021 budget session of the Parliament is considering introduction and passage of “The Cryptocurrency and Regulation of Official Digital Currency Bill 2021” [5]. The essence of this bill is to create a facilitative framework for issuance of digital currency and to prohibit all private crypto currencies in India with certain exceptions to promote the underlying technology of crypto currencies in India.


CBDC in other Economies:

The Bank of England can be considered as the first Central Bank pioneered with the introduction of CBDC in 2014. However, China is likely to be the first economy to issue retail CBDC. China carried out a test run of the Chinese CBDC by paying salaries for their government employees as CBDC in their wallets [6]. The Swedish Central Bank (Riksbank) is also looking forward to the issuance of the digital version of Swedish Krona (e-Krona) [7]. Turkey has initiated R&D for having their digital currency and aims to start pilots in the second half of 2021 [8]. In a recent Bank for International Settlements (BIS) Paper, it was observed that 86% of the 65 respondent Central banks are engaged in research or some kind of experimentation in CBDCs [9].

1. Source: RBI Press Release of 24 December 2013

2. RBI had constituted an inter-departmental group to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency.

3. RBI Notification dated 6 April 2018

4. Internet and Mobile Association of India …. (Petitioner) Versus Reserve Bank Of India ... (Respondent) in Writ Petition (Civil) No.373 of 2018 dated 4 March 2020

5. Source: [Source:]






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Contributed by

Ashish Shinde (IES 2013)

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