Central Bank Digital Currency

Central Bank Digital Currency (CBDC): a strong step against Cryptos?

Central Bank Digital Currency

The Reserve Bank of India (RBI) announced that from November 1, 2022, it will begin pilot launches of the Digital Rupee (eâ1) for specific use cases. According to the notification, the first Digital Rupee pilot will be in the Wholesale segment. After setting up a working group to study the possibility of a Central Bank Digital Currency (CBDC) in India in 2020, the RBI released a concept note on the digital rupee (e-rupee) on 7th October 2022. The Government of India had also announced the launch of a CBDC in its 2022 Union Budget.

E-rupee or digital rupee will provide an additional option to the currently available forms of money. It is substantially not different from banknotes, but being digital it is likely to be easier, faster, and cheaper. Central Bank Digital Currency (CBDC) will have all of the advantages that we see with cryptocurrencies and digital forms of payment. A digital currency can never be torn, burned, or physically damaged. They are also not physically lost.  The lifeline of a digital form of currency is indefinite.

The significant advantage of digital rupees as compared to cryptocurrency is that since it will be governed by a central authority, the volatility risk prevailing with other digital currencies such as Bitcoin, will not be there.

The RBI has repeatedly expressed concerns about private cryptocurrencies such as Bitcoin, Ether, and others being used for money laundering, terror financing, and tax evasion. The introduction of its own CBDC has been viewed as a means of bridging the benefits and risks of digital currency.

The nine banks including 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 are authorized for the distribution of the Digital rupee.

2. Why Digital Currency

As the digital economy continues to expand, the use of digital currency is also increasing rapidly. Digital currency is money in an electronic form exchanged for goods and services without the use of physical money such as notes and coins. Technology is growing and evolving, therefore, digital currency is steadily replacing physical money. Many countries like the Bahamas, Nigeria, Dominica, Montserrat, Antigua etc. have already launched their digital currency. Countries like Russia and China are considering launching their digital currency shortly.

3. Types of Digital Currencies -

There are currently three types of basic digital currencies in circulation-

  • Central Bank Digital Currency (CBDC) – money in the digital form issued by Central Bank which can be converted into physical cash.
  • Cryptocurrency – meaning there is no single party responsible for issuing or changing the currency. These are developed by private parties’ independent from Central Bank or Government. They use blockchain and cryptopathy technology for issuing the currency. Examples are Bitcoin, Ethereum etc.
  • Stablecoins – are also a type of cryptocurrency and make use of blockchain technology and cryptography. The key difference between stablecoins and traditional cryptocurrencies is that stablecoins are backed by a reserve asset such as the U.S. dollar or gold, and they’re designed not to fluctuate in value like traditional crypto. Example Tether.

4. Advantages & Disadvantages of Digital Currency –

Sl. No.




It speeds up transaction time

digital currency is not immune to hacking and other cyber crimes


Digital currency reduces the cost of the transaction

Cyber security costs are high.


The risk of theft, forgery and the need for physical storage can be reduced or eliminated with digital currency.

Cryptocurrency presents a challenge for regulators and policymakers trying to ensure financial stability


5. Salient Features of Digital Rupee -

i) Mining of Digital Rupees is Prohibited –

It cannot be mined like bitcoin. This means that the environmental and energy use concerns associated with bitcoin are unlikely to be afflict the digital rupee.

 ii) Transferability –

The retail version of the digital rupee will be token-based. Broadly this means, you find out the recipient’s public key (similar to an email address) and transfer money to them using your private key (essentially, a password).

 iii) Without Interest –

E-rupee will not earn any interest, because people might withdraw money from banks and convert it to digital rupee – causing banks’ failure.

 iv) Anonymous Up to a Certain Limit –

A bank transfer goes from an identified person to another. A cash transfer on the other hand is anonymous – you don’t know who all held that particular rupee note in the past. For the e-rupee, the RBI has proposed partial anonymity, where small amounts can be anonymous but not large amounts.

 v) Convenience –

Transacting in e-rupee can take away the inconvenience of carrying around physical notes and coins. Apart from this, the RBI has outlined some benefits for the country as a whole, such as financial inclusion, innovation and lowering the costs of cash transactions.

 vi) It can be Programmed –

It can be programmed to achieve purposes like ensuring it is only spent for a particular sector (say, agriculture). Alternatively, it can be given a limited life, like a voucher, allowing RBI to stimulate demand when needed and withdraw it when not needed. These features come with trade-offs and hence RBI has not finalised them yet.

 vii) Connectivity Issue –

The RBI has proposed offline functionality for the digital rupee – meaning you can transact without the internet. The RBI may issue limits for offline transactions to reduce such synchronisation issues or look for some technological solution to them.

viii) Taxation Exemption –

In Budget 22-23, the Government of India recognized cryptocurrencies and decided to tax 30% of any virtual asset. RBI’s digital rupee will, however, be free from tax regulations. 


6. Conclusion -

Experts believe that CBDC is one of the biggest developments in the financial world, the full impact of which will be visible in near future. India already has a stellar record as an early adopter of technology with the rapid adoption of UPI and QR-based payments across the country. With CBDC, it is expected that India will take giant strides in the world rapidly progressing towards the adoption of digital currencies. RBI has repeatedly flagged concerns over money laundering, terror financing, tax evasion, etc. with private cryptocurrencies like Bitcoin, Ether, etc. Introducing its own CBDC has been seen as a way to bridge the advantages and risks of digital currency.

Leave a Comment

Your email address will not be published. Required fields are marked *

Call Now