RBI's Concept Note on Central Bank Digital Currency

RBI has recently released a concept note on Central Bank Digital Currency (CBDC) to explain the objectives, choices, benefits, and risks of issuing a CBDC (also referred as digital rupee, or in short, e₹) in India and also to explain RBI’s approach towards issuance of such a currency. RBI will also commence pilot launch of e₹ for specific use cases.

Following important aspects have been discussed in the concept note. Only brief conclusions have been covered in this post.

1. TYPES. Two types of design have been considered- one, CBDC-Retail for the use by all private sector, non-financial consumers and businesses, and the other, CBDC-wholesale for restricted access to financial instituitons for the purpose of settlement of interbank transfers and related wholesale transactions.
2. INTEREST-BEARING OR NOT? It has been discussed that interest-bearing CBDC would make the digital currency more popular and would make monetary policy more effective. However, it could lead to disintermediation in the financial system as they would lose deposits which would impede their ability to give loans. RBI observed in the note that the economic design of CBDC should be least disruptive to the existing financial system. Moreover RBI observed that even physical cash does not carry any interest and therefore concluded that it would be logical to offer non-interest bearing CBDC.
3. ACCOUNT-BASED OR TOKEN BASED? A token CBDC is a “bearer-instrument” like banknotes, meaning that whoever ‘holds’ the tokens at a given point in time would be presumed to own them. In contrast, an account based system would require the keeping of a record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances. RBI observed that token-based CBDC would be more suited for CBDC-Retail as it is mainly devised for consumption of common public with features akin to physical cash whereas an account-based CBDC would be more suitable for CBDC-Wholesale.
4. ANONYMITY. RBI discussed the trade-off between anonymity and AML/CFT (anti-money laundering and combating the financing of terrorism framework) measures and therefore is more in favour of a middle path by making smaller transactions reasonably anonymous.
5. DENOMINATION. Two options were considered - one, minimum value and the other, fixed denomination similar to physical currency notes. RBI observed that the usage of minimum value of token may result in higher volume and, thus, lead to increase in processing time and performance issues. On the other hand, the fixed denomination similar to physical currencies would impart more trust to general public.
6. TECHNOLOGY. RBI stressed that technology related choices should not be frozen and an open-ended flexible approach should be adopted after considering various aspects like security, scalability, recoverability, interoperability, programmability, etc.
7. GRIEVANCE REDRESSAL. RBI observed that the effective and efficient resolution of customer grievances will play a key role in facilitating adoption of CBDC by the public and therefore, a robust and efficient grievance redressal mechanism would be required.