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Central Bank Digital Currency in India: Features, Uses and Risks

November 23, 2022 | Banking and Finance

India becomes one of the first few countries to launch a Central Bank Digital Currency – Digital Rupee. Learn all you need to know about this new form of currency including features, uses and potential risks.

The Reserve Bank of India (RBI) on Tuesday became one of the first major central banks to start their own Central Bank Digital Currency (CBDC) – Digital Rupee. As part of the first phase of the “Digital Rupee Pilot” project, the new virtual currency will primarily be used to settle transactions related to government securities. This is a relatively new technology in India, and it is quite important to familiarize yourself with all its aspects before dealing with it. Read on to learn about the “digital rupee” and its various features and uses.

What is RBI’s “Digital Rupee”?

Also known as CBDC (Central Bank Digital Currency), Digital Rupee is a legal tender issued by the central bank, the Reserve Bank of India, in a digital form. While it is not very different from banknotes in terms of value, it is much faster, cheaper, and easier to handle. In addition, it has all the transactional benefits of other types of digital money. However, this does not mean you can use it for the same purposes as banknotes as of now.

This digital currency should not be confused with cryptocurrency, as unlike cryptocurrency, the digital rupee will be monitored by the government. While the goal of cryptocurrencies is to enable transactions that are free from government regulations and control, the digital currency does not follow the same agenda. On the other hand, as it is launched by the government itself, they have complete control over these funds, irrespective of the individual account it is in.

The Reserve Bank of India has planned to launch this digital currency in two phases – CBDC Wholesale and CBDC Retail.
  • On 1st November 2022, RBI launched the Central Bank Digital Currency Pilot project, which focuses on enabling better, large transactions related to government securities.
  • RBI also announced that CBDC Retail will be launched within a month. However, this will only be done in a few places and for only a handful of selected merchants and customers.

What are the features of the Digital Rupee?

In a concept note shared by RBI in October 2022, “CBDC is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency, and shall be accepted as a medium of payment, legal tender, and a safe store of value.”

In the same note, RBI also mentioned that they have been exploring the pros and cons of introducing CBDCs and are working towards devising an implementation strategy that allows deployment of the digital rupee without disrupting the current financial system.

In 2020, the internal working group (IWG) stated that RBI is working on developing and implementing an account-based CBDC for the wholesale segment and coming up with a token-based CBDC for retailers.

The key feature of CBDCs is that it grants access to safe money for payments to everyone while it is directly central bank’s liability and not anyone involved in the transaction.

Two models have been examined and selected for issuing and managing CBDCs – direct or single-tier model and indirect or two-tier model.

  • Direct/Single-tier model: Under the direct model, the central bank (RBI) will solely be responsible for handling everything related to CBDCS including issuance, account management and transaction-verification.
  • Indirect/Two-tier model: Under the indirect or two-tier model, RBI and its intermediaries (banks and other service providers selected by the central bank) will carry out different roles. While the intermediaries will be responsible for dealing with consumers and managing the currency, the RBI will only co-ordinate with them for wholesale transactions.

The note released in October stated, “the indirect model is akin to the current physical currency management system wherein banks manage activities like distribution of notes to public, account-keeping, adherence of requirement related to know-your-customer (KYC) and anti-money laundering and countering the terrorism of financing (AML/CFT) checks, transaction verification, etc.”

What is the “Digital Rupee Pilot Project”?

The digital rupee pilot project is the first phase of the two-phase CBDC deployment program. It was carried out on 1st November 2022 and allows people to use this digital currency for various transactions related to government securities. While it is a completely central bank-issued and managed form of virtual currency, as of now, a few selected banks are to act as intermediaries to support the implementation of CBDCs.
The pilot project refers to RBI launching digital rupee for the wholesale segment, through which it also aims to make the inter-bank market more efficient.

It should also be noted that RBI plans to carry out the second phase of this deployment project and launch the retail segment of CBDCs within a month of the pilot program. However, it will only be launched in a few locations and be available to selected merchants and customers.

How will Digital Rupee Work?

Like cryptocurrency, the digital rupee is based on blockchain technology and aims to increase transaction efficiency and transparency.
In case of a token-based CBDC, the owner verify that his ownership of the token is genuine, while on the other hand, an account-based CBDC will be verified by the intermediary that it has been issued from.

The nine banks that have been selected by RBI to participate in the pilot project are:

  • State Bank of India
  • Union Bank of India
  • Kotak Mahindra Bank
  • ICICI Bank
  • HDFC Bank
  • HSBC
  • YES Bank
  • IDFC First Bank, and
  • Bank of Baroda.

The digital rupee is similar to sovereign currency and can be exchanged with fiat currency at par, i.e., one-to-one. According to RBI, CBDCs aim to complement the current forms of currency rather than replacing them.

Central Bank Digital Currency (CBDC) Vs. Cryptocurrency

Cryptocurrency Central Bank Digital Currency (Digital Rupee)
It is a decentralized form of currency and does not involve any governing bodies like banks or financial institutions in its transactions. It is a legal tender launched by the central bank (RBI in India) and is a currency controlled, i.e., issued and managed directly by them.
The owner is liable for the money they own in the form of cryptocurrency. The central bank is entirely liable for CBDCs.
Does not hold a specific value like physical currencies. It is digital form of physical currency that is interchangeable with fiat currency and holds the same value as coins and banknotes.
Bitcoin, Ethereum, Binance Coin, and USD Coin (USDC) are some commonly known examples of cryptocurrencies. Sand Dollar, eNaira, and Digital Rupee are a few CBDCs used in different countries around the globe.

Key Benefits of the Digital Rupee

While RBI begins the pilot project and works on making the digital rupee available for the public, it is imperative that you familiarize yourself with some of the key benefits of using this digital currency. Read on as we list a few key pros of digital rupee and the impact it has on various financial aspects.

Advanced Technology

Rather than depending on intermediaries and financial institutions, digital rupee allows you to process transactions, i.e., make payments and receive money much faster and more efficiently. It significantly reduces several risks like delayed payments due to the banking processes and verification processes, while reducing the complexity of transactions as well.

Reliable Inclusion of Financial Institutions

Unlike cryptocurrency, the involvement of central banks in CBDCs provides legal citizens a free or low-cost bank account in the central bank of the country. Besides, it also removes the liability from the public, as the central bank is entirely responsible for managing all the aspects related to CBDCs.

Eliminates the Potential for Illicit Activities

As the currency is monitored by the central bank, they keep track of exactly where each unit of the currency is at and who is its current owners.

Record of transactions

All transactions are recorded by the central bank and acts as a proof of the currency being exchanged, which can be a very crucial aspect when it comes to conflicting testimonies, short exchanges, and potential cash-theft.

Exceptional Financial Safety

CBDCs eliminate the potential of practicing fractional reserve banking – where only a fraction of deposits is backed by banks and made available for withdrawal. It, furthermore, makes deposit guarantee schemes unnecessary.

Potential Risks of CBDCs

There are certain risks associated with CBDCs that may make you think twice about using this mode of currency. Read on to learn about a few of these risks.

Cyber Threats and Single Point of Failure

CBDCs demand centralization, which makes the target area for potential cyber attacks and failure much smaller. To effectively create a cyber resilient digital currency, deploying public blockchains alongside a competitive medium on the Internet to exchange the digital currency would have been a better approach. Considering how just one failure or data breach can make us distrust a bank, as the central banks manage the entire process, CBDCs could potentially transfer this risk to them and eliminate the benefits of strategic risk-sharing structures.

Privacy and Consumer Protection

Issuance of CBDCs by a less than benign government can potentially be an infringement of consumer privacy and protections. It should be noted that nothing is stopping the weaponization of CBDCs against the public or the possibility of transaction-blockage by an entity that has gone rogue. The process of how money is saved, spent and secured should be as free as possible, while strong penalties should be implemented on defaulters.

Eliminates the Goal of Decentralization

The goal of blockchain technology is to create decentralization and enable free distribution that is not monitored or controlled by any governing body. However, in case of CBDCs, this purpose is eliminated entirely, as this form of currency is issued, managed and monitored by the central banks. By developing a closed loop system that involves a pseudo blockchain, the goal of developing this technology – tackling cyber-attacks and other methods of manipulation - is negated.


The realization of extensive benefits and equally worrying risks of CBDCs makes it quite imperative to consider if the digitization of fiat currencies is the appropriate thing to do. While the RBI will attempt to develop the most secure and seamless system for this form of currency, there is no guarantee that it is 100% secure as other blockchain technologies. However, like all technologies, CBDCs are sure to improve over time and become a more secure form of currency that is free from any potential risk.

While the introduction of CBDCs in India is a huge move by the RBI, it will definitely take time before it becomes a seamless form of transactional currency for the public.

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