What are CBDCs? Reserve Bank of India prepares to unveil CBDCs.

CBDC stands for Central Bank Digital Currency.

Reserve Bank of India is in the process of launching its own digital currency or to say in simple terms digital rupee or e-rupee. RBI wants to facilitate this process in a phased manner so as to avoid any disruption to the existing financial system and hence will conduct due pilot projects before full blown implementation.

But what actually a CBDC is and how it will work?

To define CBDC in simple terms, 

“CBDC is a legal tender issued by a Central Bank in digital or electronic form. It will have equivalency with the paper currency currently in circulation and also exchangeable at par with the same.” 

It is just the legal tender, currently being the paper currency, in a different form i.e., digital or electronic.

Now CBDCs could take two forms which are being discussed as of now:

1)      Token Based System

2)      Account Based System

1) Token Based System

Token Based CBDCs will be like bank notes as they would take the form of bearer instruments wherein whosoever holds the same will be presumed to be the owner of the same. They will be the use cases for retail transactions.

2) Account Based System

Account Based CBDCs will follow maintenance of full records of balances and transactions of each and every holder with showing the ownership of individual monetary balances. This system will be used by financial institutions for settlement of interbank and wholesale transactions.

Two models are being discussed for issuance of CBDCs

1)      Direct Model

2)      Indirect Model

1) Direct Model

In direct model RBI will take the sole responsibility of distribution of CBDCs without any intermediary.

2) Indirect Model

In indirect model, which is in use as of now, banks will take the responsibility of distribution to the public, account keeping and KYC requirements.

The whole idea of CBDCs is being worked out by RBI keeping in view the main motives of reducing the operational costs involved in physical cash management as against digital and also bring in efficiency and innovation in the payment system.