Government Launches India First Central Bank Digital Currency

Government Launches India First Central Bank Digital Currency

Why in News? 

The Government of India has launched the country’s first Central Bank Digital Currency (CBDC), known as the Digital Rupee, to promote secure and efficient digital payments. 

What is Central Bank Digital Currency (CBDC)?

• About: A Central Bank Digital Currency (CBDC) is the digital form of a country’s sovereign fiat currency, issued and regulated by the central bank (Reserve Bank of India). It represents legal tender in electronic form, backed by the government.

• Nature: CBDC is a direct liability of the central bank, forming part of the base money supply similar to paper currency. It performs all three monetary functions—medium of exchange, unit of account, and store of value—but in digital format. It is centralised, sovereign-backed, and uniquely identifiable, preventing duplication or counterfeiting.

• • Pilot Project: India’s CBDC, the Digital Rupee (e₹), was piloted in Wholesale segment on 1 November 2022 and Retail segment on 1 December 2022, maintaining parity with physical INR (₹1 = e₹1).

• Types: CBDC is broadly classified into two categories:

• Retail CBDC (e₹-R) – Used by individuals, households, and businesses for Person-to-Person (P2P) and Person-to-Merchant (P2M) transactions.

• Wholesale CBDC (e₹-W) – Used by banks and financial institutions for interbank payments, government securities settlement, and capital market transactions.

• Objectives: The major objectives include reducing cash dependency, lowering currency management costs, enabling instant settlement, improving financial inclusion, strengthening monetary policy transmission. 

• Technical Framework: India’s Digital Rupee operates on a hybrid technological architecture combining elements of Distributed Ledger Technology (DLT) with centralized oversight. It enables encrypted transactions, wallet-based storage, offline payment functionality (under exploration), and interoperability with digital payment systems.

• Global Context: In October 2020, The Bahamas became the first country to fully deploy a nationwide Central Bank Digital Currency (CBDC), known as the Sand Dollar.

• Globally, CBDC development is accelerating—over 90% of central banks are researching or piloting digital currencies, with countries like the Bahamas, Nigeria, and Jamaica already launching operational CBDCs. 

• Around 134 nations are currently exploring implementation frameworks to modernize payment systems.

• • • China (e-CNY) is the world’s largest pilot, covering 17 provinces, integrating with healthcare, tourism, and education.
    • India (e-Rupee) is the second-largest pilot, with, as of early 2025, over 7 million users. 
    • Nigeria (eNaira) was launched in 2020, focusing on financial inclusion.
    • Brazil (Drex) is an advanced, wholesale-focused pilot, aiming to tokenize financial services. 

• Features: 

• • Programmable Money: CBDC enables programmability, allowing governments to attach conditions such as purpose, time-limit, or geographic usage to funds. This ensures targeted subsidy delivery, and prevents leakages in welfare schemes.
  • Offline Transaction Capability: CBDC supports offline payments using NFC/Bluetooth-based wallets, enabling transactions in low-internet or remote rural areas. 
  • Wallet-Based Token System: Digital Rupee operates through secure electronic wallets rather than bank accounts, facilitating consumer-to-consumer and business-to-business transactions directly.
  • Instant Ownership Verification: CBDC provides irrefutable proof of ownership transfer through digital ledger records, reducing disputes in retail or corporate payments and improving settlement assurance.
  • Zero-Interest Instrument: CBDC holdings do not earn interest, making it functionally similar to physical cash and preventing disruption of banking deposits.
  • Cross-Border Transaction Enablement: CBDCs can facilitate faster international remittances by eliminating correspondent banks, thereby reducing settlement time (currently 2–5 days).
  • Auditability with Privacy: Advanced systems like zero-knowledge proof protocols allow transaction validation without revealing user identity.
  • Interoperable Payment Infrastructure: CBDC is designed for interoperability with digital platforms like UPI, enabling seamless payments through existing QR infrastructure.

How does CBDC Work?

• Currency Issuance: The Digital Rupee (e₹) is issued by the Reserve Bank of India in a digital token form, similar to banknotes. It enters circulation through commercial banks, which act as intermediaries responsible for distribution.
• Digital Wallet Allocation: Users obtain CBDC through authorized banking institutions, which provide interoperable digital wallets. These wallets can be installed on mobile devices or hardware tokens.
• Token Distribution Mechanism: Banks convert physical or electronic money into CBDC tokens on a 1:1 parity basis. This ensures value equivalence with fiat currency, maintaining price stability.
• Transaction Initiation: CBDC payments occur through wallet-to-wallet transfer, where users initiate transactions using QR codes, contactless interfaces, or digital addresses, without routing through layered clearing systems.
• Validation and Authentication: Each transaction undergoes real-time cryptographic verification using secure digital signatures. This ensures tamper-proof validation, eliminating fraud risks.
• Settlement Finality: CBDC transactions are settled with instant finality, meaning funds are transferred in real-time without settlement lag or clearing cycles.
• Record Maintenance: All CBDC transactions are recorded in a regulated digital ledger, accessible to the central bank for supervision, enabling transparent audit trails.

Benefits of Central Bank Digital Currency (CBDC)

• Reduction in Currency Printing and Logistics Cost: CBDC significantly reduces the high fiscal burden associated with printing, transporting, and storing physical currency. India spends thousands of crores annually on currency management including security ink, minting, and distribution logistics; digital currency minimizes these recurring expenditures.
• Strengthening Monetary Policy Implementation: CBDC enhances the transmission of monetary policy tools by enabling central banks to directly influence liquidity conditions and money supply in the economy. This improves policy responsiveness during inflationary pressures or recessionary trends.
• Minimisation of Shadow Economy Activities: Digital traceability of CBDC transactions helps reduce black money generation, tax evasion, and informal sector leakages. By formalizing financial flows, it enhances tax compliance.
• Promoting Innovation in FinTech Ecosystem: CBDC creates a platform for financial innovation, enabling development of smart contracts, automated payments, and machine-to-machine (M2M) transactions in sectors like logistics, supply chains, and digital commerce.
• Boost to Government Welfare Delivery: CBDC improves efficiency in real-time fund disbursement under welfare schemes, ensuring timely and corruption-free benefit transfer with precise beneficiary targeting, thus improving governance outcomes.