Central Bank Digital Currency – NEED FOR a cautious path


Reserve Bank of India (RBI), being the Central Bank of our Nation, came out with a Concept Note on Central Bank Digital Currency (CBDC) on 7th October 2022. Within a month of issuance of this note which was intended to create awareness about the digital currency among the general public, RBI has come out hurriedly with the pilot issuance of whole sale CBDC on 1st November 2022; further retail digital currency has been introduced on 1st December 2022.

The wholesale currency is used by the financial institutions to buy and sell financial assets and for interbank settlement. The retail currency is used to pay for goods and services, to send money to family members and friends etc.

“RBI broadly defines CBDC as the legal tender issued in a digital form. It is akin to sovereign paper currency, exchangeable at par with the existing currency and shall be accepted as a medium of payment and a safe store of value” claims the concept note of RBI.  

As of July 2022, 105 countries that cover 95% of global Gross Domestic Product are in the process of exploring CBDC. 10 countries have launched CBDC, the first of which was Bahamas in 2020 and the latest was Jamaica. 17 other countries including the second major economy China are in the pilot stage and preparing for possible launch. China plans for widespread domestic use of its CBDC by name e-CNY by 2023.

According to RBI, some of the key motivations for the issuance of the digital currency are: Reduction in operational costs involved in physical cash management, fostering financial inclusion, boosting innovation in cross-border payments space and providing public with uses that any private virtual currencies can provide, without the associated risks, bringing efficiency and innovation in payments system.

Reduction in operational costs

The total expenditure incurred on security printing during the financial year 1st April 2021 to 31st March 2022 was Rs.4984 crores. The concept note has made it clear quoting Bank for International Settlement that CBDC would have to coexist and complement with the existing forms of money i.e. paper rupee in our case. Hence there would not be any drastic reduction in the operational costs. Further, the technology cost of introducing CBDC is also likely to be huge. Hence the argument that there would be reduction in operational costs is not tenable.

Financial inclusion

RBI claims that 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. Even if offline transactions are done, there is a need to bring them online. It is not clear how that process would be completed. Otherwise the offline transaction would remain incomplete.

Moreover the present Government at the centre has been adopting a clear pro-corporate approach.  Presently the small and micro loans are charged with interest rate ranging from 12% to 22% per annum. It is likely to increase with the latest change in the RBI rules whereas the corporates are lent thousands of crores of rupees at about 7% per annum.  With the huge profit earned from the small loans, the big ticket loans are subsidized. Further the Cooperative Banks, Regional Rural Banks which render excellent service in the area financial inclusion are deliberately weakened by the Government. When that is the case, the argument of “financial inclusion” does not hold water.

Cross-border payments

It is reported by the World Bank that 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. “The cost of sending remittances to India, therefore, assumes critical relevance” claims RBI concept note. It is to be noted that cross-border payments are two ways and not one way as depicted by RBI.  Cross-border payments are presently guided by the RBI rules and Acts like Foreign Exchange Management Act.  Unless changes are made in those rules and the Acts, the present situation is likely to continue. If cross-border payments are made easy by changing the rules and the Act and with the introduction of CBDC, the authorities have to take note that this would facilitate not only inward remittances but also flight of money from our country; further it may also open the doors for money laundering. It is to be made clear by the RBI and the Government how those issues would be addressed effectively.

Alternate to private virtual currency

The RBI concept note states “The proliferation of crypto assets can pose significant risks related to Money Laundering & Financing of Terrorism. Further, the unabated use of crypto assets can be a threat to the monetary policy objectives as it may lead to creation of a parallel economy and will likely to undermine the monetary policy transmission and stability of the domestic currency..” quoting President of the European Central Bank.  RBI issued a circular banning crypto currency in April 2018.  In March 2020, Supreme Court struck down the RBI circular as RBI failed to defend its ban. A bill intended to prohibit all private crypto currencies in India was drafted by the Government in November 2021. But it was not introduced in Parliament. Thus the Government and the RBI have been vacillating in their stand on private crypto currencies. There is an immediate need to ban the private crypto currencies.

Now the concept note of RBI claims that “developing CBDC could provide the public a risk free virtual currency that will provide them legitimate benefits without the risks of dealing in private virtual currencies”. Nine banks namely 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 have been identified to deal with this digital currency. Out of these, only the first three are Public Sector Banks and the remaining six are private sector banks. Why is there a great dependency on the private sector banks when RBI wants to issue a safe and reliable digital currency alternate to private virtual currency? Moreover, crypto currencies which are speculative in character are no comparison with the CBDC which are regulated by RBI and intended to be an equivalent to paper currency used for procuring goods and services. Therefore this is also not a valid argument.

Efficiency and innovation in payment system

The RBI note says: “Payments using CBDCs are final and thus reduce settlement risk in the financial system. CBDC will eliminate the need for interbank settlement. It can be compared to a cash-based transaction, where instead of bank notes, CBDC is handed over leading to instant settlement. This is expected to bring in further efficiency in the payment system”.  This seems to be a valid reason as the World including our country has witnessed a metamorphosis in digital transactions in the recent years.  The CDBC is likely to increase the volume and velocity exponentially.

Nonetheless there is a need to go for digital currency as the countries covering 95% of the global GDP are exploring the issuance of CDBC and India needs to catch up with them. Further, the retail digital payments using Unified Payments Interface (UPI) which began with the modest 3 lakhs monthly transactions amounting to Rs.100 crores in 2016 November has grown upto 730 crores transactions amounting to about Rs.12 lakh crores in November 2022.  At the same time the money circulation which was about Rs.18 lakh crores in November 2016 has gone above Rs.32 lakh crores in November 2022.  This clearly shows the need for increased money supply. The digital currency may slowly reduce the need for paper currency. For that, the process has to be seamless and should not disturb present system.

However, it is not clear from the concept note as to what technology will be utilized and how strong are the protective fire walls. In the Budget speech of 2022, the Union Finance Minister announced that it might be block chain technology that is used for crypto currency.  It has already been proved that block chain technology is susceptible for hacking and is not foolproof.  Hence, it is not advisable to use the same technology; rather it is advisable for the Government and the RBI to have their own technology with strong cyber security and sound technical standards. It is all the more important as the retail digital currency is preferred to be token-based and the person receiving the token is assigned the responsibility to verify that his ownership is genuine. RBI and Government have to be cautious in introducing the CBDC and not to hurry till it is voluntarily accepted by the public.


  1. சிறப்பான விளக்க கட்டுரை… காலத்தில் கிடைத்ததில் மகிழ்ச்சி…

  2. காலத்தே வந்திருக்கும் கட்டுரை.
    வாலெட் மூலம் பணப் பரிவர்த்தனை ஏற்கெனவே நடந்துவருவதின் நீட்டிப்பாக மட்டுமே இதை புரிந்து கொள்ள முடிகிறது.
    ஆயினும் மக்களின் வரவு செலவு தகவல்களின் தொகுப்பு இயல்பாகவே ரிசர்வ் வங்கியில் உருவாகிவிடும். இது அரசின் குறியிலக்காக உணர்கிறேன் !
    மீண்டும் நன்றி 🙏

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