About Central Bank Digital Currencies
- CBDC stands for Central Bank Digital Currency.
- It is a digital form of central bank money, denominated in the national unit of account.
- It is a direct liability of the central bank, unlike commercial bank deposits, which are liabilities of commercial banks.
- CBDCs are different from:
- Physical cash → central bank money in physical form.
- Commercial bank deposits → private money created within the banking system.
- Cryptocurrencies → generally not liabilities of a central bank.
- UPI → a payment system/infrastructure; it is not itself a currency.
- India’s CBDC is called the Digital Rupee (e₹) and is issued by the Reserve Bank of India (RBI).
Types of CBDCs
| Type | Users | Purpose |
| Retail CBDC (rCBDC) | Individuals & businesses | Everyday payments |
| Wholesale CBDC (wCBDC) | Banks & financial institutions | Interbank/wholesale transactions |
1. Retail CBDC
- Designed for use by the general public.
- Can be used for P2P and P2M transactions.
- Intended to function as a form of digital central bank money.
- RBI’s e₹ supports transactions through digital wallets and can also interact with UPI QR codes.
2. Wholesale CBDC
- Designed primarily for financial institutions.
- Can be used for interbank transfers and settlement of financial transactions.
- May improve the efficiency of securities settlement and reduce certain settlement and counterparty risks.
CBDC vs Cryptocurrency vs Bank Deposit vs UPI
| Feature | CBDC | Cryptocurrency | Bank Deposit | UPI |
| Issuer | Central Bank | Generally private/decentralised ecosystem | Commercial Bank | NPCI/payment system |
| Nature | Digital central bank money | Crypto-asset | Commercial bank money | Payment infrastructure |
| Central Bank Liability | Yes | No | No | No |
| Legal/monetary unit | National currency | Varies | National currency | Uses existing money |
| Purpose | Digital payments/settlement | Various uses | Deposits & payments | Instant payments |
| Example | Digital Rupee (e₹) | Bitcoin | Bank account balance | UPI |
India’s Digital Rupee (e₹)
- India’s CBDC is known as the Digital Rupee (e₹).
- Issued by the Reserve Bank of India.
- Represents digital central bank money.
- It has both retail and wholesale applications.
- RBI’s retail CBDC ecosystem uses digital wallets provided through participating entities.
Potential Benefits of CBDCs
- Financial Inclusion: Expands access to digital central bank money, especially for underserved populations.
- Efficient Payments: Can improve payment and settlement efficiency and reduce costs.
- Programmable Payments: Enables conditional and purpose-specific transactions, including targeted transfers.
- Offline Payments: Facilitates digital transactions in areas with limited internet connectivity.
- Cross-Border Payments: Interoperable CBDCs can improve speed, efficiency and cost of cross-border transactions.
- Financial Market Innovation: Wholesale CBDCs can support tokenised assets and faster, more efficient settlement.
| This concept has been elaborately discussed in the – Alternatives to the SWIFT Payment System |