Central Bank Digital Currency (CBDC), also known as the digital rupee or e-rupee in India, is a digital form of fiat currency issued by a country’s central bank.
It is defined as a digital liability of the central bank that is widely available to the general public and is exchangeable one-to-one with physical fiat currency.
Key Features of CBDC
CBDC possesses several unique characteristics that distinguish it from other forms of digital payment:
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Sovereign Currency: It is issued by the Central Bank (the RBI in India) in alignment with national monetary policy.
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Legal Tender Status: It must be accepted as a medium of payment, a safe store of value, and legal tender by all citizens, enterprises, and government agencies.
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Liability of the Central Bank: Unlike bank money, which is a liability of commercial banks, the e-rupee appears as a liability on the central bank’s balance sheet.
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Fungibility and Accessibility: It is freely convertible against cash and commercial bank money
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Notably, it is a fungible legal tender for which holders do not necessarily need a bank account.
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Efficiency: It is expected to lower the costs associated with the physical issuance of money and the processing of transactions.
Categories of Use
CBDC into two primary categories based on its intended use:
- Retail (CBDC-R): This is a general-purpose digital version of cash meant for daily transactions by the private sector, non-financial consumers, and businesses.
- Wholesale (CBDC-W): This version has restricted access and is designed for select financial institutions to settle interbank transfers and other large-scale transactions.
Forms and Issuance Models
The e-rupee can take different technical forms and be distributed through different models:
- Token-based vs. Account-based:
A token-based CBDC acts like a bearer instrument (similar to banknotes) where the holder is presumed to own the currency; this is preferred for retail use because it is closer to physical cash.
An account-based CBDC requires maintaining records of balances and verifying the identity of the holder, making it more suitable for wholesale use.
- Direct vs. Indirect Issuance:
In a direct (single-tier) model, the central bank manages all aspects, including issuance and account-keeping.
In an indirect (two-tier) model, the central bank issues CBDC to intermediaries (like commercial banks), who then distribute it to consumers and handle claims.
Global Context: The Digital Yuan
The sources note that China is exploring an innovative feature with its digital version of the yuan, known as DCEP.
They are testing expiration dates, meaning the currency could expire if not used within a certain timeframe, essentially forcing consumers to spend it by a specific date.
To understand the difference between these systems, you can think of bank money like a digital tab at a local shop where they keep track of what they owe you; CBDC is like having the actual government-stamped coins in a digital pocket—it is the value itself, not just a record of it held by a middleman.