The Case of Central Bank Digital Currency

The Case of Central Bank Digital Currency

Digital Lending: The missing piece of puzzle
Budget 2021: The return of Keynesian Economics
RBI Guidelines on Regulation of Payment Aggregators and Payment Gateways


The digital age has truly arrived and the concept of money seems destined for a revolutionary change. The concept of digital currency has gained traction in the last decade with the launch of Bitcoin in 2009, the first of its kind private digital currency backed by a de-centralized ledger system. As per Centre for Strategic and International Studies estimates there are around 7000 encrypted currencies in circulation across the world amounting to USD 754 million in 2019. However extreme price volatility of cryptocurrencies makes them unsuitable for use as a store of value and unit of account, the two basic functions of money. They are primarily viewed as a speculative instruments, which dilutes their utility as a medium of exchange too.

Another category of digital money is Stablecoins, first introduced in 2014. These are private sector digital tokens backed by fiat (government issued) currency held in physical reserves. However, in the absence of any sovereign guarantee, Stablecoins are also prone to price volatility and the related impact on global monetary policy.

In light of these concerns of the market participants and to restore public faith in a Central Bank issued digital money, around 80% of the world’s central banks under the aegis of the Bank for International Settlements (BIS) have begun collaborative efforts on Central Bank Digital Currency (CBDC).

What are CBDCs

CBDCs, as evident from the nomenclature, are Digital Fiat Currencies issued by the Central banks of various countries. Various forms of CBDCs have been prevalent over the years since a large part of the money supply by Central banks are held in digital mode by commercial banks, also known as reserve money. The differentiating factor this time is the retail focus that will democratize central bank account holding for the individual customers. Since the digital currency is issued by the Central banks and held directly by citizens,  the holders of CBDCs will have a direct claim on the State. This in turn will be a guarantee for public to put faith on CBDCs as digital cash that will remain stable.

Global Development in CBDCs

Leveraging on its robust digital payment ecosystem, People’s Bank of China (PBOC) commissioned work on “Digital Currency Electronic Payments” program as early as 2014. In April’2020, China launched a pilot program in four of its cities: Shenzhen, Suzhon, Chengdu, and the satellite city of Xiong’an.

Similarly, European Central Bank (ECB) emphasized the need for Digital Euro to foster international cross border payments. The United States Federal Reserve is also evaluating the potential cost and benefits of CBDCs for the internal economy, payment systems and its international implications.

In India, the Reserve Bank of India has constituted an internal committee to formulate the viable models of a CBDC.

Core Features

Any development effort on CBDCs has to focus on its easy convertibility at par with cash. Ease of use through card or mobile phone will facilitate its adoption. It must also maintain a high degree of availability in comparison to cash with additional feature for offline use. Further ‘cost to the user’ will be a defining feature, as would the compatibility with legacy infrastructure. The CBDC system should offer real time transaction settlement which would require it to be interoperable and compatible with private sector digital payment systems to facilitate seamless money flow.

Addressing Security concerns will be crucial for early adoption of CBDCs, considering  serious issues faced with cryptocurrencies in this regard. There must be ways and means to protect the digital currency from being counterfeited.

Benefits of CBDCs

CBDCs are expected to reduce friction in the existing payment system, with allied advantages of cost saving and higher speed of transactions. Tax evasion might also be curtailed to a large extent by bringing more economic activity within the tax base, since digital transactions have a better money trail compared to cash.

The largest beneficiary group would be the hitherto unbanked and underbanked individuals, who would have access to electronic payment system and a plethora of financial product.

Risks of CBDCs

The primary risk stems from the possibility of disintermediation of the banking system. If central bank currency is widely held at the retail level it might undermine the need for commercial banks.

The apparent boon of hassle-free transaction from the comfort of our homes can may soon translate into a financial nightmare in the event of fraud. The sanctity of data privacy has also been flagged as another grey area with developers still grappling with the mitigation features to be incorporated in its design.


There is a good case for CBDCs in today’s world, but at the same time we cannot brush aside concerns on architecture, infrastructure, and rules of access to CBDCs. Currency design  must incorporate implications on cross border payments and the realities of specific jurisdiction of the issuer countries. After all, public faith in sovereign fiat currency cannot be compromised at the altar of technology.

Author Profile
Debjyoti Mukherjee has 12+ years of experience with companies like ICRA Analytics Ltd, Aditya Birla Minacs in credit analysis, mutual funds and re-securitization domains. He has also spearheaded the business development of a corporate communications start-up. He is an MBA (Finance) from Globsyn and writes on topics related to economy, banking, and fintech.

Disclaimer: The opinions expressed here are those of the author and does not reflect the views of