Central Bank Digital Currency
The Digital Rupee or e₹ is India’s Central Bank Digital Currency (CBDC)—a digital version of the Indian Rupee (₹) issued by the Reserve Bank of India (RBI). It is legal tender in electronic form, holding the same value and trust as physical cash.It is available in the same denominations as physical currency.
Just like a paper ₹ note, e₹ can be used to pay, receive, or store money, but in a digital wallet on your smartphone or device. It offers all the key features of cash—RBI guarantee, anonymity (to an extent), and instant settlement—while adding the benefits of digital payments such as ease of use, security, and reduced handling costs.It is currently in pilot mode (ongoing with 15 Banks), since December 2022, to test and explore the uses/ features/ technology and applications of Digital Rupee.
Types of CBDC
- Retail CBDC (e₹-R)
- It is available to general public via digital wallets, smartphone apps, etc.
- Wholesale CBDC (e₹-W)
- Used among banks and other licensed financial institutions for interbank payments and securities transactions.
Retail CBDC
- Digital Rupee (e₹) is India’s Central Bank Digital Currency.
- It is the digital form of the Indian Rupee, issued by RBI.
- It is being issued in the same denominations that paper currency and coins are currently issued.
- It is being distributed through financial intermediaries, i.e., banks.
- The e₹-R offers features of physical cash like trust, safety and settlement finality.
- As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks.
- Digital Rupee (e₹) is Legal tender:
- In terms of Section 26 of the Reserve Bank of India (RBI) Act, 1934, every ₹ bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein and is guaranteed by the Central Government. e₹, being a digital form of the ₹ bank note, is legal tender and is the liability of Reserve Bank of India.
- How is Digital Rupee created and issued?
- Creation and issuance of retail e₹ is identical to the arrangement for issuance of paper currency i.e., RBI creates e₹ and issues them to banks and non-banks electronically. Banks and non-banks, thereafter, are responsible for facilitating onboarding and opening e₹ wallets for their customers on their mobile phones.
- How e₹ Can Be Held and Used
- Held in an e₹ wallet, offered by banks and non-banks.
- e₹ wallet is a digital wallet that can be opened on one’s mobile phone/device. e₹ wallet stores the Digital Rupee, similar to the physical wallet/purse that stores the physical currency. e₹ wallets are being currently provided by banks and non-banks, which are part of the retail CBDC pilot.
- Person-to-person and person-to-merchant payments are supported.
- e₹ can be loaded/redeemed/transferred from/to one’s bank account to/from the e₹ wallet 24 hours x 7 days a week.
- Is there any difference between e₹ and UPI?
- e₹ is a digital form of ₹ whereas UPI is a means of payment.
- In addition to being used for payments, e₹ also serves as a ‘store of value’, i.e., e₹ can be withdrawn from one’s bank account and kept separately in the e₹ wallet.
- In the case of P2P and P2M payments made at any CBDC QR, the transactions happen between two e₹ wallets, and are settled instantaneously without passing through user’s bank accounts.
- For P2P and P2M payments, the functionality of scanning a UPI QR from an e₹ app has also been enabled. In such cases, the settlement will be based on the UPI settlement timelines.
- The offline feature of e₹ enables the user to transact in locations with limited or no internet connectivity. It is expected to mirror the advantages of physical cash, making it a reliable solution for usage in remote areas.
Wholesale CBDC
- Wholesale CBDC (e₹-W) is a digital currency issued by RBI, designed exclusively for:
- Financial institutions
- Intermediaries
- It is used for:
- Interbank settlements
- Large-value transactions
- Key Features:
- Operates within a restricted ecosystem.
- Employs programmability and smart contracts for efficient processing.
- Potential Benefits of Wholesale CBDC
- Streamlined settlement systems for financial transactions.
- Reduced settlement risks through central bank money.
- Leverages programmability and smart contracts to:
- Automate processes.
- Lower transaction costs.
- Improve transparency and security.
- What are the current use cases in e₹-W and what are the benefits?
- There are two ongoing use cases of e₹-W,
- funds settlement of secondary market transactions in Government Securities, and
- settlement of inter-bank lending and borrowing in call money market.
- Settlement in central bank money is expected to reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk and benefitting from the programmability and smart contracts functionalities of e₹-W.
Wholesale CBDC vs Retail CBDC
Advantages of CBDC (Digital Rupee / e₹)
- Ease and Speed of Transactions
- CBDC allows instant, hassle-free payments for goods, services, peer transfers, and government benefits, ensuring final settlement backed by the RBI.
- Improved Payment Efficiency and Accessibility
- CBDC can drastically reduce transaction costs, especially in cross-border remittances, by bypassing intermediaries and enabling 24/7 secure and seamless transfers.
- Enhanced Security and Transparency
- With robust encryption and authentication protocols, CBDC offers strong protection against cyber fraud. The transparent digital trail improves compliance, aids in money laundering prevention, and strengthens overall financial oversight.
- Reduced Risks and Costs of Cash Handling
- CBDC minimizes the need for physical currency printing, storage, and transportation, reducing associated costs, theft, and counterfeiting risks.
- Offline Functionality in Remote Areas
- CBDC can potentially support offline payments using Bluetooth or NFC technology, allowing transactions even without internet—benefiting rural areas etc.
- Programmable Money for Targeted Use
- CBDCs can be programmed for specific end-uses, such as directing agricultural loans to farm inputs only. This ensures fund utilization monitoring, prevents diversion, and enhances policy efficiency.
- Boosts Financial Inclusion
- CBDC offers an alternative to individuals outside the formal banking system, especially in regions with limited branch or ATM presence, enabling access to digital transactions without internet dependency.
- Supports Government Welfare Transfers and Fiscal Management
- Direct benefit transfers (DBTs) through programmable CBDC can ensure end-use verification, reduce leakages, and improve public expenditure efficiency.
What are the Uses of Digital Rupee?
- As a participating retailer or customer, one can carry out person-to-merchant (P2M) and person-to-person (P2P) transactions using e₹.
- Additionally, one can make payments to retailers by scanning QR codes displayed at their premises.
- For example, one can settle bills for purchases at retail shops and shopping centres and transfer funds between accounts. In essence, e₹ can be utilised in the same manner as cash
What are the Uses of Digital Rupee?
- Cybersecurity Risks
- CBDCs are susceptible to hacking, phishing, and system breaches, which can undermine trust in the monetary system and potentially destabilize financial institutions.
- Privacy Concerns
- CBDCs, especially if not designed with privacy-by-default, allow transaction-level traceability, raising concerns over data protection, surveillance, and user anonymity.
- Digital Divide
- Lack of digital infrastructure and low digital literacy in many rural or underserved populations may lead to exclusion, exacerbating inequality and financial marginalization.
- International Regulatory Challenges
- Cross-border use of CBDCs demands international cooperation to align regulations, avoid money laundering risks, and prevent regulatory arbitrage.
- Varying DLT/Blockchain standards across countries can hamper interoperability of CBDCs.
- Threat to Banking System (Disintermediation Risk)
- If individuals and businesses prefer holding CBDCs over bank deposits, it may reduce liquidity in commercial banks. This can limit credit creation, raise interest rates, and impact the role of banks as financial intermediaries.
- Threat to Monetary Sovereignty
- The rise of foreign CBDCs (e.g., Digital Dollar or Digital Yuan) could lead to currency substitution in smaller economies, threatening national monetary sovereignty.
Central Bank Digital Currency (CBDC) represents a significant innovation in the realm of money and payments. It offers the potential to modernize India’s financial infrastructure, reduce dependency on physical cash, and promote a digitally inclusive economy. The e₹ (Digital Rupee), backed by the Reserve Bank of India, combines the trust and stability of sovereign currency with the flexibility and speed of digital transactions.
However, for its successful adoption, concerns around privacy, cybersecurity, financial disintermediation, and digital inequality must be addressed through careful policy design, legal safeguards, and phased implementation. While CBDCs are not a silver bullet, they mark a pivotal step in aligning India’s monetary system with the needs of a 21st-century digital economy.
FAQs
Q1. What is a Central Bank Digital Currency (CBDC)?
CBDC is a digital version of a country’s fiat currency issued by its central bank. In India, it is known as e₹ (Digital Rupee) and is issued by the RBI.
Q2. Is the Digital Rupee different from UPI or digital wallets?
Yes. Unlike UPI or wallets (which are private platforms that transfer bank money), CBDC is direct central bank money, equivalent to physical cash.
Q3. Can CBDC be used offline?
Yes. RBI is piloting offline CBDC use through NFC or Bluetooth-based transactions to ensure access even in low-connectivity areas.
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