CBDC: Understanding CBDC( Central Bank Digital Currency)

CBDC full form is Central Bank Digital Currency

What is CBDC?

Imagine you have a ₹100 note in your wallet. It’s a direct promise from the RBI Governor. It’s pure, official money.

Now, imagine that same ₹100 note exists not on paper, but as a digital code on your phone, put there directly by the RBI.

That’s a Central Bank Digital Currency (CBDC).

In simple terms, CBDC is the official, digital form of a country’s currency. It is not a new currency; it is just a digital version of the same Indian Rupee, issued and backed by the Reserve Bank of India. In India, we call it the e-Rupee (e₹).

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How is it Different from UPI, Paytm, or Card Payments?

This is the most important concept to understand for your exam. All the digital payments you do today are like writing a digital cheque.

• When you use UPI/Card: You are sending an instruction to your bank (e.g., BoB) to move money from your account to someone else’s account. The money moves between commercial banks.
• When you use CBDC (e-Rupee): You are not sending an instruction. You are directly handing over official digital money from your RBI wallet to someone else’s RBI wallet. It’s like handing over a physical banknote, but digitally. The transaction is final in itself.

Here is a simple table to remember the difference:

Feature	CBDC (e-Rupee)	UPI / Net Banking / Cards
What is it?	A direct liability of the RBI. It’s the digital form of cash.	A liability of your commercial bank (like BOB, SBI HDFC, ICICI).
What does it represent?	It IS the money.	It is an INSTRUCTION to move money.
Bank Account Needed?	Not necessarily. You could have a CBDC wallet without a bank account.	Yes, a bank account is mandatory.
Settlement	Instant and final. Just like handing over cash.	Involves inter-bank settlement, which happens in the background.

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The Two Types of e-Rupee in India

RBI has been testing two versions of the CBDC, and by now in July 2025, the pilot programs are quite advanced.

1. CBDC-R (Retail):
   • For whom? For everyone – you, me, and shopkeepers.
   • Purpose: For everyday payments, just like we use cash or UPI. You can hold it in a special digital wallet provided by banks.
2. CBDC-W (Wholesale):
   • For whom? For big players only – banks, large financial institutions, and the government.
   • Purpose: For large-value transactions, like banks settling accounts between themselves or buying government securities. It makes these big transactions faster, cheaper, and more efficient.

Why is RBI Introducing CBDC?

• Reduces Cost of Physical Cash: Lower costs associated with printing, distributing, and storing paper money and coins.
• Faster & Cheaper Settlements: Reduces the need for complex inter-bank settlement systems, especially for wholesale transactions.
• Boosts Financial Inclusion: People without access to traditional bank accounts could potentially use a basic CBDC wallet.
• Increases Efficiency & Innovation: Enables new types of financial products and makes cross-border payments potentially faster and cheaper.
• Reduces Risk: Since it’s a direct liability of the RBI, it has no risk of a commercial bank failing.

What are the Challenges?

• Cybersecurity: Protecting the system from sophisticated cyberattacks is the biggest challenge.
• Data Privacy: How to ensure the privacy of transactions while also preventing illicit activities.
• Digital Divide: Ensuring that people without smartphones or in areas with poor internet connectivity are not left behind.

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