Central Bank Digital Currency Indian Context

Central Bank Digital Currency in the Indian Context

The concept of a Central Bank Digital Currency (CBDC) has
been attracting interest across the globe with most central banks
actively exploring and examining CBDC.1 Globally, the key trends
of payments modernisation include transformation of immediate
interbank gross settlement and emphasis on faster retail payment
systems. Therefore, many central banks foresee another such
potential innovation in CBDC.
A recent speech by the RBI Deputy Governor T Rabi Shankar on 22
July 2021 highlighted India’s long-awaited position on CBDC and
illustrated the need for CBDC in India. The speech also highlights
the RBI’s approach along with certain key considerations.
While these discussions and deliberations continue, we present
our point of view outlining how CBDC can impact our lives. We
have discussed various CBDC models – wholesale and retail, the
technical issuance architecture, key principles, potential risks,
impact on various stakeholders, use cases and key considerations.
We hope you will find this to be a good and insightful read.
For details or feedback, please write to:
vivek.belgavi@pwc.com or mihir.gandhi@pwc.com

1 https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1111

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Central Bank Digital Currency in the Indian context

Table of contents
1. Introduction

4

2. Key principles/considerations for CBDC in India

8

3. Use cases and business models for CBDC in the Indian context

9

4. Potential risks involved in CBDC

12

5. Government and regulatory perspective towards CDBC in India

14

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Central Bank Digital Currency in the Indian context

Introduction
Central banks are an important pillar of the financial
ecosystem. Fundamentally, they have always provided
efficient, quick, seamless, stable solutions for their
respective economies. This includes payment systems
and the issue of currency. Recent advancements in
technology and the global economy have pushed
these apex bodies to revisit their basic functions and
adapt.
The Reserve Bank of India (RBI) has defined Central
Bank Digital Currency (CBDC) as the legal tender
issued by a central bank in a digital form. It is the
same as a fiat currency and is exchangeable one-toone with the fiat currency.2
Money as a concept has evolved over time, beginning
with the barter system where goods were exchanged
as ‘money’ to metallic and paper currency, banking
instruments and now digital currency. Despite the
changing forms of money, it has always had three
basic characteristics:
•

It is a store of wealth.

•

It can be used as a medium of exchange.

•

It acts as a unit of account.

Currency is this ‘form’ of money which the central
bank of any jurisdiction issues, assumes liability for
and accepts as legal tender.

Due to its various forms, rapid innovation and private
nature (not sovereign issued), the emergence of digital
money was accompanied by a lot of hesitation with
respect to usage. There were also concerns about its
security and decentralised nature, which gave rise to a
very volatile environment for cryptocurrency or stable
coins. However, over time, increased usage of these
forms of digital money gave central banks across the
world a push to meet this demand, especially with the
growing preference for electronic payment methods
and the increasing cost and operational hassles
involved in printing money.
Central banks around the world, including those of
China, Russia, Bahamas or the USA, are developing
or researching the use of CBDC.3 A survey conducted
by the Bank for International Settlements (BIS) in 2021
revealed that 86% of central banks around the globe
were actively researching the potential for CBDCs,
60% were experimenting with the technology and
14% were deploying pilot projects.4 Retail CBDC
projects appear to be more advanced in emerging
economies with financial inclusion stated as an
expected outcome. Wholesale efforts are mostly
conducted in more advanced economies with more
developed interbank systems and capital markets.5
They come with their own set of benefits that the
governments of these countries can leverage.

The RBI has also talked about CBDC in its ‘Report on
Currency and Finance 2020-21’6 and is exploring the
case for issuing and operationalising a CBDC.
A CBDC is a digital form of the fiat currency issued
by the central bank of a country and is in lieu of
the paper/metal currency issued which is the direct
liability of the central bank – that is, it is denominated
in the national unit of account. A CBDC acts as a
safe, government-backed, and ultimate medium of
settlement by eliminating all claims that occur during a
transaction.
A general-purpose CBDC needs an underlying
system for issuance and distribution to the public in a
convenient way. Depending on the model adopted, the
whole ecosystem will need various players to function,
which includes the RBI, public and private banks,
payment service providers (PSPs) and operator(s). If
we consider the wider ecosystem, we can also include
other financial institutions and third-party service
or application providers. While issuance models
implemented may not be inherently different from the
current intermediary system of currency issuance,
every central bank and commercial bank will need
to adopt a parallel end-to-end blockchain enabled
system for CBDC issuance and circulation.

2 https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1111

3 https://www.atlanticcouncil.org/blogs/econographics/the-rise-of-central-bank-digital-currencies/
4 https://www.bis.org/about/bisih/topics/cbdc.htm

5 https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-cbdc-global-index-1st-edition-april-2021.pdf
6 https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RCF26022021FUL14763733401448089D2B70141732D717.PDF

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Central Bank Digital Currency in the Indian context

Stages of global adoption of CBDC

Despite assessing its
pros and cons, Bank of
England in UK has not
reached a decision to
launch CBDC.

Canada

United Kingdom
France

Bahamas
Retail CBDC
Analysis phase
Pilot stage

The Bahaman
CBDC or “Sand
Dollar” was officially
launched in 2020.

In April 2020, China
became the first
major economy to
pilot digital currency.

Sweden
Ukraine

Turkey

China
UAE
!”#$%

Thailand

Eastern Caribbean

Ecuador

Implemented and operational
Wholesale CBDC
Analysis phase
Trial phase

Uruguay launched its pilot
CBDC e-peso in 2017.
Though the pilot was free
of technical snafu, it has
not been launched at a
full scale yet.
Uruguay

Korea

Japan

Hong Kong
Cambodia
Singapore

South Africa

Pilot stage
Implemented and operational
Source: PwC Global CBDC Index 2021

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Central Bank Digital Currency in the Indian context

Wholesale CBDC can play a significant role in the
evolution of wholesale payments which central banks
are trying to modernise. Wholesale CBDC will facilitate
interbank settlements on net basis. It will also support
conditionality of payment where settlement will be
dependent on another payment transaction or delivery
of an asset/security. Wholesale CBDC can be used
for interbank settlements, cross-border remittances,
and capital and security markets. It is expected
that wholesale CBDC will make existing payment
transactions efficient.7

Categories of CBDCs
Wholesale CBDC

Retail CBDC

Direct (between
intermediaries)

Direct
Indirect (two-tiered)

Ideally, the issuance architecture of retail CBDC can
be of three major types:
• Direct issuance: The central bank issues directly to
the public. The CBDC claim is on the central bank.
• Hybrid issuance: The central bank issues to PSPs,
which onboard clients and execute payments. The
bank periodically records the retail balances.
• Indirect (two-tier): The claim is on the intermediary
commercial bank but backed by the central bank.
The banks on-board customers and handle retail
payments. The central bank handles wholesale
payments.

Categories of CBDCs
CBDC can be broadly divided in two major categories
based on usage within a country’s financial and
monetary ecosystem.8

1. Wholesale CBDC
This category of CBDC is generally used for trade
between the central bank and public/private banks
within a country. Payments using CBDC help in the
7 https://www.bis.org/publ/arpdf/ar2021e3.htm

Hybrid
reduction of risks related to liquidity and counterparty
credit. This space is one of the most important uses
of CBDC as it helps in making the whole financial
system of the country faster, safer, and economical.
In the Indian context, it will allow the RBI to interface
faster with and among its intermediaries and help
in improving the existing real-time gross settlement
(RTGS) system that is used in the current systems.

transactions for day-to-day activities. Usually, retail
CBDC is based on distributed ledger technology
(DLT), like a private blockchain network handled by
the government which helps it to trace transactions
while maintaining anonymity. It also helps mitigate the
involvement of private parties, thus preventing any
criminal activity, like money laundering or fraud.
Retail CBDC can be issued directly to the public
by the central bank. This form of issuance is called
direct issuance. Alternatively, retail CBDC can be
issued to intermediaries (which can be public/
private banks) who then issue it to the public much
like a fiat currency. This method of distribution
forwards the counterparty risk towards the regulated
intermediaries and is called indirect issuance. A third
issuance methodology, called hybrid issuance, can
also be followed, in which retail CBDC is issued to
intermediaries, as in the case of indirect issuance.
However, in the case of hybrid issuance, the central
bank periodically updates its own ledger with the retail
balance records.

Wholesale CBDC can facilitate cross-border
transactions between the wholesale CBDC systems
of multiple countries, which is achieved by creating
a corridor network or ‘bridge’ with an operator node
run jointly by the central banks of the participating
countries that issue the depository receipts. It helps
in making the cross-border settlements across the
participating central banks much faster and safer.

Retail CBDC and monetary system

2. Retail CBDC

Customer

This category of CBDC acts as the digital format of
the fiat currency which is meant for the general public
and used by ordinary consumers to conduct financial

Direct claim
Cash

Central bank
Direct claim

Retail CBDC
Commercial banks
Direct claim

Bank deposits/savings

8 https://www.blockchain-council.org/blockchain/what-is-cbdc-a-comprehensive-guide/
9 https://www.bis.org/publ/othp33.pdf

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Synthetic CBDC is another potential alternative
framework. Here, central banks can engage with the
privately issued digital currencies which are backed by
funds kept by the issuing entity with the central bank.
However, these may lack some key features of the
CBDC, such as neutrality, openness, and inclusivity.
The public or end user cannot hold any claim against
the central bank in such cases, so essentially, they act
as a form of ‘narrow-bank’ money.9

Infrastructural design considerations
CBDCs are mostly built on DLT, but evolving research
suggests the feasibility of hybrid architecture. The
choice of technology, however, depends on the CBDC
design.
Retail CBDC models are more suited for accountbased models, allowing users to create accounts with
the central bank or intermediaries to receive CBDC.
Such a design must be easy to use and access and
can be open instead of permissioned. This would
allow private entities to develop products and services
over the network in an easy manner. Wholesale

CBDC design elements
Account-based/
token-based
CBDC
Direct/indirect/
hybrid issuance

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Key design
elements for
CBDC

Wholesale/
retail/general
purpose
Centralised/
decentralised
operations

models, on the other hand, can use tokens to create
a wholesale payment network and increase efficiency.
This infrastructure does not have the adoption,
scaling and regulatory complexities that retail CBDC
infrastructure does. There are also general use
models, which can be used for both wholesale and
retail issuance.
In the case of retail CBDC, central banks must also
consider if the CBDC will be issued directly, indirectly
or in a hybrid manner. A central issuance model allows
the central bank to retain control of the underlying
CBDC network. However, it has to be implemented
within an ecosystem of commercial banks, financial
institutions and service providers. The network can
also lead to disparity in security, distribution and
data privacy, as private parties can design their own
access bridges to the network. The central bank
would also have to bear overhead cost and network
responsibilities in the direct model.
Indirect models allow users to interact with
decentralised applications and solutions. With
multiple participants in the system shouldering the
responsibility of the network and the cost, the security
risk is also reduced. Central banks would have limited
control over the design of payment rails. Additional
processing and network capabilities to interface the
ledger with existing financial applications would also
have to be considered, along with ways to notify
participants about events such as updates.
Hybrid models combine direct and indirect models,
and private and financial players can be allowed to
operate participatory nodes. Such a model is quite
resilient but requires significantly complex operational
structures.

Central Bank Digital Currency in the Indian context

Key principles/considerations for CBDC in India
Although CBDCs are issued by central banks across
the globe in different formats based on the broad
categories discussed above, it is still bound by three
foundational or key principles or considerations that
dictate its issuance across diverse geographies.
In the context of India, it becomes necessary for
the government and the RBI to consider these key
principles before issuing a CBDC within the country
based on their common public and monetary
policy objectives, because in the current economic
landscape, they have to maintain both financial and
monetary stability by making the CBDC ecosystem as
trusted as that of the fiat currency.

Key principles of CBDC

Non-disruption

Innovation and
competition

Coexistence

1. Non-disruption

3. Innovation and competition

When issued by the RBI as a new form of money,
the CBDC should in no way interfere with the overall
public policy objectives of the government and it
should not be an impediment to the RBI’s ability to
carry out its mandate with respect to both monetary
and financial stability. It should, in effect, maintain the
integrity and uniformity of the Indian currency and
let the general public use all forms of the currency
interchangeably, which in turn will reinforce the
singleness of all these forms of currency in existence.

The CBDC ecosystem, once introduced, should
continuously innovate and boost its overall efficiency
through healthy competition with the other existing set
of digital payment systems, so that the average user in
a country like India, who has a plethora of instruments,
some of which are less safe than CBDC, still adopts
CBDC as their preferred mode of transaction in dayto-day activities.

2. Coexistence
The CBDC should coexist or complement the other
existing forms of currency, including cash and
settlement accounts. It should also coexist with all
the commercial bank accounts and work in harmony
with fiat currency. The CBDC should in no way push
for replacement and rather should support all other
alternatives like cash, as long as the public demand
for such forms of currency exists.

The role of third-party PSPs as well as public and
commercial banks will be crucial in putting CBDC
at the forefront of innovation. Together, PSPs and
banks will not only help in much faster adoption but
also create an accessible and robust system for the
distribution of CBDC within the country’s jurisdiction. It
is also essential for private economic agents, be it an
organisation or an individual, to be free to decide and
choose between all existing forms of the currency as
well as the different payment systems to conduct their
transactions.

In a country like India, which had around 190 million
unbanked citizens in 2017,10 it is very crucial for the
government to have a plan for all forms of currency to
coexist, and to use CBDC as a tool for the inclusion of
the underbanked and unbanked sections of society.
CBDC is also expected to revolutionise the way
citizens pay using digital payment modes and will run
parallel to existing payment rails.

10 https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf

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Use cases and business models for CBDC in the Indian context
Benefits of CBDC
CBDCs can be instruments that support the public
policy objectives of the government by providing a
safe and resilient means of payments. They promote
efficient, inclusive and innovative payments if properly
monitored, and the risks involved are overcome through
effective means.

Benefits of CBDC

AML and CFT

Monitoring
and
traceability of
transactions

High-value transactions

Payments

Secure
payments

Improved
liquidity

Ease of
cross-border
transactions

Instant
settlements

Aid
distribution

The RBI has also highlighted some of the benefits
of the CBDC in its report on currency and finance,11
including the ability to monitor transactions, and the
distribution of ‘helicopter money’ as a form of aid
during emergencies. It has also stated the potential of
CBDCs in targeted distribution of money for particular
goods and services as well as for aids and subsidies.
Recently, the RBI Deputy Governor highlighted that
CBDC would not only create desirable benefits in
payment systems but also protect the general public
from the environment of volatile virtual currency.12
Apart from these, CBDC also helps in implementing
anti-money laundering (AML) and combating financial
terrorism (CFT) measures by acting as a highly secure
way for cross-border transactions. It can speed up
the high-value transactions as no post reconciliation
is needed due to the existence of the DLT. It can also
benefit many sections of the society by being a tool for
offline payments through digital tokens.

Apart from being a tool for digital transformation
of payments, CBDC has multiple facets. It has
multiple forms in terms of usage across different
geographies. Four major use cases in the Indian
context are discussed below.

Major use cases of CBDC
Complete visibility of all transactions
(‘notarised’ transactions)

Tax
Legal
departments proceedings

Banking and Internal and
external audits
financial
services

Use cases for CBDC in the Indian context

01 Programmable
02 Cross-border remittances
03 Retail payments
04 MSME lending
05 Offline payments

Payer
(user 1)

CBDC
e-wallet

Decentralised
ledger/
blockchain

CBDC
e-wallet

Payer
(user 2)

11 https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RCF26022021FUL14763733401448089D2B70141732D717.PDF
12 https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1111

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1. Programmable payments – DBT
A possible use case for CBDC is ‘fit-for-purpose’
money used for social benefits and other targeted
payments in a country. For such cases, the central
bank can pay intended beneficiaries pre-programmed
CBDC, which could be accepted only for a specific
purpose. For example, pre-programmed CBDC
could be issued for LPG subsidies as direct benefit
transfer (DBT). This CBDC could only be accepted at
authorised LPG agencies and would be declined for
use in other areas. LPG agencies would be able to
convert this CBDC to a general-purpose CBDC or fiat
currency at any commercial bank, which would have
the necessary authorisation to change the nature of
the CBDC.
Such subsidies can also be extended to other sectors
such as agriculture, where subsidies for fertilisers
could be transferred via the CBDC route. This CBDC
could only be accepted at authorised fertiliser outlets,
ensuring minimal leakage in the subsidy programme.
Programmable payments can also be used by other
organisations for their employees’ expenses, including
for fuel and telecom bills. Moreover, programmable
payments can also be used in industrial supply chain
ecosystems. In this case, pre-programmed digital
CBDC could only be used for specific purposes such
as fuel expenses and state border taxes.

Key participants
RBI, commercial banks, commercial organisations
merchants, software and hardware providers,
general public

Benefit
Minimises misuse of social benefit programmes
and other subsidies as it ensures correct usage of
money transferred

2. Cross-border remittances
CBDCs could be used for faster cross-border
remittance payments. International collaboration
among the major economies of the world, including
India, could help create the necessary infrastructure
and arrangements for CBDC transfer and conversion.
Such infrastructure must ensure interoperability of
CBDCs across jurisdictions and quick transfer of
CBDC for success. In such an environment, CBDC
remittances could happen in real time, rapidly reducing
the time required for the payment to be received by
the intended recipient.

Key participants
RBI, other central banks, commercial banks,
software providers, general public

Benefit
Fast, real-time remittance of money and reduction
of time required for receiving payments across
borders

3. Retail payments
CBDCs can also be used for retail payments. Payment
instruments could be made available for payment
transactions to be made via CBDC. Furthermore,
universal access attributes of a CBDC could also
include an offline payment functionality.
Retail CBDC distributed by the RBI and commercial
banks would have to be held in electronic wallets/
accounts by the end users. This would enable
payment means between the following:
• Consumer to consumer: Where consumers could
exchange CBDC between their wallets
• Consumer to business: Where consumers can use
CBDC to pay for products and services
• Business to business: Where businesses can
exchange CBDC between their corporate account
wallets
As CBDCs offer instant settlement, they lower the risk
in clearing and settlement of retail payments, thus
reducing counterparty risk.
CBDC’s underlying technology, along with the
currency’s digital nature, make it superior to existing
digital payments. Its irrefutable nature combined with
ownership record transfers can provide irrefutable
evidence of proof of ownership.

Key participants
RBI, commercial banks, businesses, software and
hardware providers, OEMs, general public

Benefit
Alternative secure payments which are instantly
settled and lower risk in clearing of payments

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Central Bank Digital Currency in the Indian context

India Stack for
digital currency

Purpose

Enablers

Owners

Consent layer

Data-sharing framework

Transaction ledger

RBI

Cashless layer

Payment network

Blockchain/DLT-based
payment system, i.e.
faster payments, offline
payments, remittances,
transit, etc.

Payment system operators,
Institute for Development
and Research in Banking
Technology (IDRBT),
consortium of banks and nonbanks

Paperless layer

Digital storage and
retrieval of information

Aadhaar Mapper,
DigiLocker

Account aggregators, Central
Registry of Securitisation
Asset Reconstruction and
Security Interest (CERSAI),
Depositories, Ministry of
Electronics and Information
Technology (MeitY)

Key participants

UIDAI, National Securities
Depository Limited (NSDL)

Caters to the needs of people living in areas without
internet connectivity by serving as a secure mode
of payment

Presence-less
layer

Open access based
identity validation

4. MSME lending
Instant lending to micro, small and medium enterprises
(MSMEs) in India can be possible with the help of
CBDC. As more MSMEs use CBDC, banks can draw
up a more accurate borrower risk profile. This can be
used to promptly meet MSME financing requirements.
Moreover, stimulus for MSMEs can also be disbursed
quickly from the central bank. This can help
businesses grow and sustain themselves during
periods of uncertainty where availability of cash
is limited. CBDC’s traceability can help MSMEs
prove their creditworthiness. Moreover, it leads to
transparency and can be extremely resilient to forgery.

11 PwC

The digital wallet/application can be used in NFCenabled devices – a feature phone or a smartphone.
In areas with weak networks or with no internet, it will
be highly secure and easy solution for peer-to-peer
payments. The verification of identity, confirmation of
a transaction and payment will happen over the offline
wallet in an account-agnostic way without the need for
an internet connection.

Layers

Aadhaar, PAN

Key participants
RBI, commercial banks, businesses, software and
hardware providers, general public

RBI, commercial banks, businesses, software and
hardware providers, OEMs, general public

Benefit

Although there are a multitude of advantages of
introducing a CBDC in India, it also carries its potential
set of risks that can cause instability for the RBI.

Benefit
Accurate risk profile of borrowers, faster
disbursement of loans, accurate tracking of loan
usage

5. Offline payments
Offline payment is another avenue which can be
enabled by CBDC. The offline wallet in general would
be a separate wallet and could be based on near-field
communication (NFC) technology.

Central Bank Digital Currency in the Indian context

Potential risks involved in CBDC
Potential risks of CBDC

01 Cyber hacks and threats
02
03
04
05

Threat to monetary sovereignty
Disintermediation of banks
Risk to financial inclusion
Threat to privacy

1. Cyber hacks and threats
CBDCs might be subjected to cyber hacks which
might lead to server blockages or unforced timeouts
or service declines. Decentralised systems are usually
good at handling such situations, but a resilient
system with anti-hack measures should be preferred.
Other than such cyber hacks, CBDC can be exposed
to other cyberthreats that primarily include distributed
denial-of-service (DDoS) attacks that disrupt services,
supply-side attacks to infrastructure and side channel
attacks to user devices and payments applications.13
CBDC systems based on DLT are vulnerable to
DDoS attacks because for a transaction to occur, it
needs to interact with all other nodes in the network.
A DDoS attack is usually an attempt to disrupt the

traffic towards any server or network by overwhelming
it with a huge amount of traffic in a very short time.
And if these cyberattacks are not taken care of by
the government, they will jeopardise the integrity of
the CBDC system, and the general public will lose
confidence in the ecosystem.

2. Impact on monetary policy
The high adoption of CBDC within a country’s financial
system could have an impact on the monetary policy,
creating unnecessary instability in the economy
without proper measures.
Higher adoption rates curb the flow and use of fiat
currency and in extreme circumstances the economy
is forced into substituting the Indian rupee for any
foreign currency like the dollar. This happens in rare
cases is when the country’s fiat currency has lost its
value due to instability or hyperinflation. However,
such substitution can be prevented if there are limits
on the amount of CBDC held by any individual.
Other ways to handle any negative impact are to
improving awareness about CBDC among people and
educating them so as to build trust in the usage of
CBDC.

3. Impact on the role of commercial banks
Two-tier issuance architecture is a good approach for
a retail CBDC as it helps in saving a run on the central
bank. In this architecture, the central bank backs the
issuance of CBDC and distribution to the general
public by the commercial banks based on securities

or cash deposits held at the central bank. The role
of banks needs to be clearly defined in the whole
distribution and management of CBDC with proper
measures against disintermediation.
The disintermediation of banks happens when
commercial banks can’t support a large-scale
withdrawal of money in its deposits by the public or
the conversion of such deposits into CBDC deposits,
which forces them to go back to the central bank for
financial support. Thus, the overall load of multiple
banks falls on the central bank in such a case,
destabilising the financial system.
The conversion of fiat currency into CBDC would
depend a lot on the interest rates being given for
banking deposits and CBDC. A large number of
people will convert at least part of their deposits
into CBDC and with higher incentives for CBDC, the
risk of such heightened withdrawals from banks and
conversions to CBDC will increase. The outflow of
such deposits would be harmful for commercial banks
as they would need an alternative source to fund the
lending business, thus decreasing the ability of banks
to give loans to the public.
Some policies regarding limits on the amount of CBDC
deposits and zero interest on such digital wallets/
accounts can help address some of these issues
faced by commercial banks. It would be safe to say
that these areas need further deliberation by the
central bank and the government.

13 https://www.bankofcanada.ca/2020/06/staff-analytical-note-2020-11/

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Central Bank Digital Currency in the Indian context

4. Impact on financial inclusion
In a country like India, where around 550 million
people still use feature phones,14 it is important for
CBDC to not only cater to the tech-savvy youth, but
also to include feature phone users and people from
lower socioeconomic groups within the country.
Another 845 million15 people have smartphones, out
of which many still dn’t use mobile banking or digital
payments in their daily lives.

There will be a need for strong cooperation between
different government agencies and regulatory bodies
so that a balance is maintained and a proper data
or information collection framework is implemented
which oversees the ecosystem.

There are a plethora of reasons for exclusion to occur
in the case of something like CBDC. These can range
from economic factors, lack of knowledge, propensity
of people in tier-2 or tier-3 cities to use cash, and
unawareness of the existence of CBDC in some
markets.
To build a CBDC ecosystem and make it sustainable,
it is essential to address all these issues and for CBDC
to act as a tool for inclusion by solving the problems
through innovation, as in the case of offline payments.

5. Threat to privacy
The introduction of CBDC will increase the security
and safety of transactions as all of them will be
validated and captured in a distributed ledger.
However, there is a small trade-off between
combatting AML and CFT and privacy because
transactions of people and businesses will not be
completely anonymous.
Therefore, it is very important for the authorities to
strike a balance between AML and other measures
intended to curb illegal activity and maintain the
confidentiality of personal and financial information of
citizens.

14 https://economictimes.indiatimes.com/tech/hardware/overall-india-handset-market-growth-to-fall-in-2020/articleshow/72950192.cms
15 https://www.statista.com/statistics/467163/forecast-of-smartphone-users-in-india/

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Central Bank Digital Currency in the Indian context

Other key considerations for CDBC in India
The RBI has outlined some of the benefits and risks
with CBDC in its ‘Report on Currency and Finance
2020-21’, which indicates that the concept is still in its
initial exploratory phase and the issuance model may
be ready by year end. As we discussed some of the
use cases of a CBDC in the Indian context, it is also
necessary for us to explore how the digital currency
will change or affect the regulatory landscape along
with the country’s monetary and fiscal policies. To
understand the impact of CBDC, there are three major
areas which need to be explored where changes are
expected:

1. Change in regulations to curb impact on
monetary policy
The implementation of CBDC in an emerging market
like India, which has a large credit market dominated
mostly by commercial banks, can have major
implications for the current monetary policy as well as
the financial stability of the country.
To manage any potential impact on the monetary
policy, one way is to use two-tiered architecture for
the issuance and distribution of CBDC wherein there
is a ceiling on the amount of CBDC that can be held
by any individual in their digital wallets. This would
help the government to curb the conversion of current
account savings account (CASA ) accounts on a
large scale to CBDC holdings. Another way to ensure
minimal conversion is to provide zero interest on such
CBDC e-wallets, which will minimise any arbitrage
between bank deposits and CBDC.

From a regulatory perspective, some regulatory
policies for penal action against people who violate
the ceiling on CBDC can be made mandatory, such
as having zero/negative interest rates on such digital
wallets/accounts.
With the usage of CBDC in cross-border remittances,
it is imperative for us to understand the AML/CFT
risks that can arise due to the anonymity and value
of transactions. The lack of clarity in compliance
or supervision might have an adverse effect on the
country’s fiat currency. A good option to combat
these complications and follow the standards set by
the Financial Action Task Force (FATF) is to have new
regulations and a central oversight body set up by
the RBI to enforce such measures for all cross-border
transactions and to mandate the capturing of some
necessary information about the sender and receiver
within the CBDC transaction node itself for future
tracking and references.

2. Impact on existing payment rails
CBDC, which may rely on DLT, will result in the
development of a new CBDC network or payment
system which will coexist along with the existing
payment modes. Working along with existing players
and upcoming PSOs, payment umbrella entities,
FinTechs and technology providers specialising in
blockchain/DLT will help in developing payment rails
and products supporting CBDC.
RTGS, which primarily deals with high-value
settlements, can be integrated into the distributed
ledger which will automatically do the liquidity saving

16 https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RCF26022021FUL14763733401448089D2B70141732D717.PDF

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mechanism (LSM) that is currently used to identify the
net settlement value at the end of the day, because
the ledger in itself will validate each transaction, thus
reducing the need for further reconciliation.
Payment rails around CBDC can create additional
revenue streams for the participants and stakeholders.
These revenue streams can further be expanded
with the expansion of payment-related use cases for
CBDC.
Further, CBDC may increase the traceability and
reliability of transactions as information will be stored
in the decentralised network. For any transaction to be
authentic, multiple parties will have to attest it before
it is stored in the DLT. The currency can function
without the need for an external body to reconcile all
transactions, although the decentralised network itself
can be operated and owned by the RBI.

3. Technology architecture
The technology used for CBDC transactions is
generally DLT, which provides a peer-to-peer network
encrypted through public key cryptography and runs
on consensus algorithms.
The advantage of having CBDC is that it keeps
immutable and irreversible records for each
transaction, by which the true ownership can be
known.
It also helps implement the concept of ‘programmable
money’ as the digital currency transaction nodes
within the DLT can store and validate useful
information or metadata about transactions and one
can also add security features to prevent any misuse.
Central Bank Digital Currency in the Indian context

The sudden spike in interest in CBDC is due to the value central
banks foresee in terms of fulfilling public policy objectives,
maintaining economic stability, and providing people with a
convenient, safe and reliable payments system.

Conclusion

Each country’s position with respect to adopting CBDC varies.
A few countries are conducting research and testing iterations in
order to set up their CBDC in a phased manner, while others are
sprinting towards deployment. In the Indian context, there are
ongoing discussions and efforts to evaluate how and when CBDC
can be implemented. This will unlock significant opportunities for the
ecosystem players to come up with services that make it easier and
convenient for citizens to transact and make digital payments for
various use cases and requirements.

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Central Bank Digital Currency in the Indian context

Contact us
Vivek Belgavi
Partner, Financial Services Technology Consulting
and India FinTech Leader
PwC India
vivek.belgavi@pwc.com
Mihir Gandhi
Partner and Leader, Payments Transformation
PwC India
mihir.gandhi@pwc.com

Contributors
Zubin Tafti
Kanishk Sarkar
Aditya Chowdhury
Shamik Bandyopadhyay
Vasundhara Kulshrestha