RBI's Concept Note on Indian CBDCs

The Reserve Bank of India (RBI) has released a concept note on Central Bank Digital Currency (CBDC), referred to as Digital Rupee, in India. The Government of India announced the launch of the Digital Rupee from the financial year 2022-23 in its last budget and consequently the RBI constituted an internal high-level Committee to study various aspects of CBDC. Based on the deliberations of the committee, the RBI has issued this concept note which broadly captures benefits, motivation, design features, technology choices, privacy aspects, and risks associated with CBDC in India

Though the concept note only identifies and highlights important aspects of CBDCs which must be understood, deliberated and decided, it also subtly conveys the policy stand that the RBI is likely to take on some of the issues discussed in the note. 

The Concept Note’s Core Ideas

The concept notes contain several pages justifying the need to create a digital rupee and even elaborately distinguish the proposed CBDC from the existing payment infrastructure which is already significantly digitized. Among the key motivations, the concept note names many benefits including a reduction in operational costs, innovation in payments, cross-border payments, and financial inclusion.

CBDC vs. Cryptocurrency

Interestingly, one of the ‘motivations’ for CBDC, as per the concept note is as follows: 

It is the responsibility of the central bank to provide its citizens with a risk-free central bank digital money which will provide the users the same experience of dealing in currency in digital form, without any risks associated with private cryptocurrencies.

RBI seems to conceive CBDC as an alternative to cryptocurrencies to “meet the public’s need for digital currencies”. 

Wholesale and Retail CBDC

CBDCs have been classified into two broad categories: Retail (general purpose) CBDCs will be utilised by private entities, non-financial businesses, and consumers; Wholesale CBDCs will be restricted for use by select financial institutions. Central banks intend to use both mediums in the Indian economy since Retail CBDCs address financial inclusion. At the same time, Wholesale CBDC has the potential to transform the settlement systems for financial transactions undertaken by banks to ensure efficiency and security in terms of the utility of collateral, operational costs, and liquidity management. Such a system would then complete reconciliation, confirmation, and finally, completion of the transaction by ensuring fund transfer between bank accounts. 

Single-tier or Two-tier Model 

The direct or single-tier model of CBDC involves the direct interaction of businesses or individuals with the central bank which will not require any intermediaries. However, if this model is adopted, the RBI will be responsible for the customer onboarding, KYC, and related operational aspects of the CBDC. 

The indirect CBDC is a typical Central Bank Digital Currencies type with considerable similarities to existing retail payment processes. Individuals would need an intermediary layer of financial institutions like commercial banks etc. to access and use CBDC. Such intermediaries oversee onboarding and communications with businesses and individuals and send payment messages to financial institutions. 

Considering the operational obligations required on the part of RBI, the concept note concludes that the indirect or two-tier model is the most suitable architecture for retail CBDC in India. Therefore, RBI will only create and issue tokens and the banks, exchanges, or other Token Service Providers (TSPs) will take care of the user onboarding, KYC, and other procedural compliances. 

Should CBDCs bear interest?

RBI has highlighted that if the CBDC bears interest, it will shift away from having cash-like attributes to a “deposit-like” attribute which could lead to a massive “disintermediation in the financial system”. Such disintermediation will cause a loss of deposits to the banks and will impede the bank’s credit creation capacity. On the other hand, if CBDC is not interest bearing then it will only be used as a payment instrument, but will not remain attractive as a store of value. The concept note does not select a winner here and rather suggests a possible middle path by imposing a limit on the amount of CBDCs that can be held by consumers for transactional purposes. RBI has emphasized that CBDC should be introduced in a way that is least disruptive to the existing banking systems and, therefore, it is less likely that CBDCs would be bearing any interest. 

Token-based v Account-based Model

Token CBDCs are bearer instruments where whoever holds the tokens at a given point will be presumed to own them. However, an account-based system requires a check of the record of balances and transactions of all holders of the CBDC and indicates the ownership in accordance with it. RBI has recommended utilizing a token-based system for retail CBDCs and an account-based system for wholesale CBDCs. The wholesale CBDCs will be issued in account-based form since it attempts to offer instant settlements and facilitates transactions. The retail CBDCs will comply with a token-based system to ensure universal access to the digital rupee, enabling the detection of token counterfeiting and potentially restoring value if an individual loses the device. Under such a regime, users could withdraw digital tokens from banks like they withdrew physical cash.

Anonymity vs. AML/KYC 

Retail CBDC must-have traits similar to currency/cash to attract customers. The concept note highlights the following traits:

  1. Anonymity – Transactions can be completed without maintaining evidence of transacting parties
  2. Universality – Currency can be used for any transaction; and
  3. Finality – payment using CBDC should unconditionally settle the transaction.

Cash offers significant anonymity to users which may be difficult to adopt in the design of the digital rupee. CBDC being a digital form will invariably leave transactional footprints. Though RBI seems to be in favor of allowing anonymity, at least for transactions up to certain threshold limit, it also highlights the importance of balancing between allowing anonymity and following customer identification compliances.

Few Other Considerations

The concept note has also identified a few broader technical considerations while deciding the technical design and platform for the Indian CBDC, but does not answer the much-awaited question – of whether CBDC will be based on Blockchain. The note mentions that the platform can either be a distributed ledger or a centralized system. Broader technical principles highlighted by the RBI include – cyber security, technical stability, scalability, rate of the transaction, cross-platform support, and configurable workflows. 

Regarding the possible use of DLT, RBI has highlighted that the consensus mechanism involved in DLT requires additional overhead and allows lower transaction speed than conventional architectures. As per the note, DLTs are, therefore, not favored for larger jurisdictions. The note, however, concludes by saying that the ‘choice of tech architecture must also consider how resource- and energy-intensive the solutions are‘. RBI has also highlighted that the digital rupee should ideally also have offline functionality considering the sections of the country which do not have access to the internet.  

RBI has clearly signified its vision to design and develop CBDC as an interoperable framework for cross-border payments with real-time settlement. CBDC should also smoothly integrate with the existing digital payment infrastructure of the country and should be introduced in a manner that does not disrupt the existing banking and payment systems. 


RBI has identified and outlined important aspects which would be considered while designing and finalizing the digital rupee. The concept note has few hits and few misses. It is great to see that RBI is likely to endeavor to design CBDC in a way that provides anonymity to users at least for smaller transactions. The idea behind separating and creating two different forms of CBDCS – wholesale and retail – is also welcome. Indian CBDC can significantly strengthen India’s case for promoting the rupee as an international currency and can be used in cross-border payments and settlements involving international trade. 

The technology on which CBDC will be based is still not answered, though the concept note names a few tentative options including a centralized system and DLT. Also, the note misconceives CBDC to act as a substitute or alternative for private cryptocurrencies which is at best can only partially true. Further, many of the use cases and benefits of CBDC are in the context of payments and settlements and the other innovative use cases of CBDCs seem to have been overshadowed. 


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