What is Central Bank Digital Currency?

Who would’ve thought that digital payments would be so successful! The way Indians have adopted to digital payments in the last few years is exemplary. The major factor pushing the adoption was definitely Covid lockdowns. Our government and RBI have stayed in favour of digital payments, supporting the development of online payment platforms and their extensive implementation.

Now, the government is all set to take digital finance in India a notch higher by launching digital currency. It is also known by various names like Digital Rupee, e-Rupee, Central Bank Digital Currency by RBI, CBDC and RBI Digital Currency.

What is digital currency and how does it work?

A digital rupee or e-Rupee is a sovereign currency issued by the central banking institution, Reserve Bank of India, and a major step towards digitising Indian Rupee. Digital currency is money in the electronic form, which you can use to make contactless transactions. The release of digital currency is aimed to boost the digital economy and make the currency management system more economic and efficient.

The sovereign currency will be available in a digital form issued by the Central Bank and will appear as a liability on your Central Bank balance sheet. The digital form of Indian Rupee can be exchanged with the fiat currency and thus can be used to make C2C, C2B and B2B transactions with ease.

What is CBDC?

CBDC or Central Bank Digital Currency is the electronic incarnation of India's official currency—the Indian Rupee. You can get digital and direct access to liquid cash with this electronic medium for payment and settlement. Just like paper money, digital money will also remain a Central Bank liability and our country’s fiat currency will dictate its value.

While some countries across the world have already launched digital avatars of their currencies, many are in the process of creating their own digital currency.

The two categories of CBDC

CBDC is being developed in two distinct categories: Wholesale CBDC and Retail CBDC.

Wholesale CBDC or CBDC-W is being designed for institutional use using which institutions can carry out payment settlements. They would primarily be utilised by financial institutions like banks. Wholesale CBDC would allow banks to make payments quickly and automatically and there is a scope for cross-border transactions to become more reliable and faster.

Retail CBDC or CBDC-R is being designed for the public to make their everyday financial transactions. Issued and backed by the country’s Central Bank, individuals can use the retail CBDC as digital cash. The CBDC can replace your need to carry physical currency and reduce associated economic rents.

Advantages of CBDC

The citizens of India have a lot to benefit from CBDC. Below are some of the advantages of CBDC:

1. Faster cross-border remittances

Since the delivery of CBDC will be made in real-time, it would eliminate long turnaround times, especially in the transfer of cross-border remittances. The disbursement time will thus be reduced, especially during holiday season and long weekends. However, for this to realise, CBDCs from different countries will have to be compatible with each other.

2. Easy risk profiling of potential borrowers

With the use of CBDC, the government will be able to efficiently track the risk profiling of potential borrowers. This can result in instant disbursement of loans to banking customers as well as businesses.

3. Efficient lending of government funds

CBDC will also help streamline the lending of government funds that are distributed to selected businesses and individuals.

4. Easy offline transfers

The NFC technology can allow you to use your CBDC wallet offline. With this, you can make easy and safe peer-to-peer transfers even in areas with poor internet connection.

While Indians have been prompt at adopting digital payments, it still has some ground to cover in the country. The CBDC can become the catalyst to make our economy a cashless economy with its safe, fast, and streamlined transactions.