Central Bank Digital Currency (CBDC)

A Central Bank Digital Currency is the digital form of a sovereign country’s fiat currency, issued and regulated by the sovereign nation’s monetary authority or central bank.

CBDCs are digital representations of central bank liabilities that are broadly accessible and usable by the public.

Reserve Bank defines CBDC as the legal tender issued by a central bank in a digital form. It is the same as a sovereign currency and is exchangeable one-to-one at par (1:1) with the fiat currency

Reserve Bank of India (RBI) has issued digital rupee as the CBDC for India. You can see the denominations below.

Features of CBDC

The features of CBDC include:

CBDC is sovereign currency issued by Central Banks in alignment with their monetary policy
It appears as a liability on the central bank’s balance sheet
Must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
Freely convertible against commercial bank money and cash
Fungible legal tender for which holders need not have a bank account
Expected to lower the cost of issuance of money and transactions

Types of CBDC

Wholesale CBDCs

Wholesale CBDCs are designed for restricted access by financial institutions.
Wholesale CBDCs are used for improving the efficiency of interbank payments or securities settlement
Wholesale CBDCs has the potential to transform the settlement systems for financial transactions undertaken by banks in the G-Sec Segment, Inter-bank market and capital market more efficient and secure in terms of operational costs, use of collateral and liquidity management

Retail CBDCs

Retail CBDCs are potentially available for use by all private sector, non-financial consumers and businesses
Central banks interested in addressing financial inclusion are expected to consider issuing CBDC Retail

CBDC Benefits

Reduces counterparty risk
Promotes financial inclusion
Simplifies monetary and fiscal policy implementation
Programmable currency & allows creation of purpose based money

RBI Design choice for CBDCs in India

Key Idea

CBDCs bridge the gap between traditional fiat money and digital payment systems while maintaining sovereign backing.