Analysing the Reserve Bank of India’s Concept Paper for a Digital Rupee Issuance

Considerations for the design and development of a Central Bank Digital Currency (CBDC)


In October, the Reserve Bank of India (RBI) released a concept note on a Central Bank Digital Currency (CBDC) or a Digital Rupee for India.  CBDC is a digital version of the Indian Rupee or any fiat currency.  RBI is exploring an account-based wholesale CBDC (w-CBDC) for wholesale payments and inter-bank settlements and token-based retail CBDC (r-CBDC) for retail transactions. However, most of the policy motivations as highlighted in the Concept Paper are relevant for an r-CBDC. The RBI does not discuss the innovation potential of a w-CBDC in-depth. Globally, some central banks such as Singapore, Canada and South Africa have analysed the issuance of retail and wholesale CBDC separately and it may have been useful to do so in the case of India.

The introduction of a Digital Rupee will have huge implications for the financial system and therefore its design (economic, technical and legal) and implementation has to be carefully calibrated to ensure minimal disruption to the existing financial system. This is particularly relevant for a r-CBDC, which has the potential to present competition to banks and retail payment methods.  In this three-part, blog series, we will examine the key motivations and legal and policy implications of a Digital Rupee issuance. Based on this analysis, we will suggest key principles/issues that should inform RBI’s roadmap for CBDC issuance. 

What is a CBDC?

As a digital version of the Indian Rupee or any national currency, a CBDC would be issued by a country’s central bank as a legal tender that can be claimed against the central bank.  It will be distinct from the existing central bank money that exists as banknotes and accounts held by financial institutions (mostly banks) with the central bank. 

Policy Motivation

Identifying the policy motivation for a CBDC is important since it will determine its design. The RBI’s motivation for introducing CBDC includes reducing the cost of physical cash management, furthering digitisation and innovation in payments, financial inclusion, improving cross-border payments, and countering the rise of cryptoassets in the Indian economy. This is in line with the policy motivations of other central banks in developed and developing economies. For some key motivations outlined by RBI, it is important to consider the following issues. 

Supporting competition, innovation and efficiency in payments

In India, retail digital payments are primarily concentrated in payment systems operated by the National Payments Corporation of India (NPCI) (such as UPI and IMPS). In October 2018, NPCI processed nearly 48% of the retail electronic payment transactions (excluding paper) in volume aggregating to 15% of the value of retail electronic payment transactions. UPI and IMPS transactions constituted around 70% in terms of volume and 7% in terms of value of the total digital payments in the FY 2021-22. 

RBI notes that the concentration of payment system operations with a single or few operators may raise systemic and operational risks and result in lack of competition.  As the RBI proposes to explore a two-tier CBDC (explained later) with private sector participation, it will enable the entry of private sector players who can offer CBDC related payment services. The RBI should allow such private sector intermediaries to build value-added services on top of the CBDC system to allow for innovative payment solutions for consumers. This in turn can promote competition and may encourage such players to compete to offer CBDC related payment services and innovate for end users.   

Supporting financial inclusion

Many developing economies consider financial inclusion as a primary objective of CBDC. This is important for economies with an underdeveloped financial system and lower financial penetration. In India, CBDC can complement ongoing financial inclusion measures and must not be viewed as an absolute solution to financial inclusion challenges. For CBDC to truly promote financial inclusion, it must be able to address the causes of exclusion, which are often complex issues spanning across socio-economic factors, such as lack of financial literacy, connectivity issues and inadequate access to a phone by women customers. If financial exclusion or underrepresentation stems from such factors, particularly an aversion to digitisation, CBDC alone will not be enough to address these issues, unless it is embedded in a wider set of reforms. 

Safeguard the trust of the common man in the national currency vis-à-vis proliferation of crypto assets

The emergence of cryptoassets and stablecoins is an important factor that has compelled central banks to explore a CBDC. The emergence of stablecoins issued by private entities whose value is backed by an asset or a fiat currency is an important development raising concerns about its impact on existing fiat currencies. However,  other cryptoassets at least in the Indian context are not primarily used for payment purposes and their use case is mostly confined to speculative investments. To that extent, given the primary user objective of CBDC and such cryptoassets is not similar, it is not clear if the issuance of CBDC will impact cryptoassets in general, except stablecoins. 

In addition to these motivations, a r-CBDC is important to ensure that citizens have continued access to central bank money even if there is a decline in cash. This is important for India where the Government is proactively promoting digital payments. 

Design Considerations 

Account-based w-CBDC

The RBI is exploring an account-based w-CBDC for wholesale transactions / inter-bank payments. Financial institutions already maintain accounts with the RBI. It is not clear what will be the nature of improvements or changes that will be made to this feature. 

Token-based r-CBDC

The RBI is exploring a token-based e-CBDC which will be a digital token issued by the RBI which will be a claim against it. It will be like a “bearer instrument” like a banknote. Whoever holds the token is presumed to own it. Transactions using account-based CBDC will involve verification of the account holder and transactions using token-based CBDC will involve verification of the authenticity of the token itself. Since a r-CBDC is meant for public consumption with features akin to cash, RBI notes that it may be useful to have a token-based CBDC which can be stored in wallets. It is understood that this model will allow users access to CBDC tokens based on a password-like digital signature using private-public key cryptography without requiring verification of personal identification. 

However, some experts question the distinction between account and token-based retail CBDC, and argue that a CBDC may exhibit both features. RBI envisages verification of larger CBDC transactions, which may require some form of customer due diligence, in which case elements of account-based model will also be integrated. Further, it may be necessary to examine if the Digital Rupee will have access restrictions both in India and for international use. For instance, the EU is exploring if the use of the Digital Euro could be limited to residents (and possibly visitors for the time of their stay). Foreign residents can also open e-CNY wallets for basic payment needs while travelling in China. 

Two-tier CBDC

In line with many central banks, RBI is keen to adopt a two-tier indirect CBDC model where consumers would hold their CBDC in an account/wallet with a bank or service provider. RBI  would track only the wholesale CBDC balances of the intermediaries. Such an approach is preferred over the direct CBDC model where RBI is responsible for all aspects of CBDC issuance including customer onboarding, and transaction verification. The direct model may not be feasible for central banks which may neither have the expertise nor the institutional capacity to carry out such activities. In adopting a two-tier model, there is a need for an operational and legal framework subject to which such intermediaries operate. The key features of this framework will be discussed in Part II of this series. 


An important policy question for CBDC design is the degree of anonymity that CBDC should provide if it seeks to present features like banknotes. The RBI correctly notes that anonymity in a digital world is a “misnomer” and it can be misused for illicit purposes. Accordingly, RBI discusses “anonymity for small value and traceable for high value,” akin to anonymity associated with physical cash. Even today, on specific large value cash transactions there is a requirement for quoting the permanent account number for verification purposes. Even for e-CNY, a tiered Know-Your-Customer (KYC) is adopted where different levels of KYC are required for different types of wallets. Based on the strength of the personal information identification of customers, transaction, daily limits and maximum balance is assigned to wallets.  

Offline Functionality

To ensure that CBDC is able to support financial inclusion objectives, the RBI proposes that it should have offline functionalities. This is important for locations where there are connectivity issues. The EU notes that such offline CBDC is likely to be anonymous; accordingly, it may be useful to limit the use of such transactions.  Both the EU and Sweden have noted the concerns associated with offline functionality, including risks relating to illegal transactions, double spending, and manipulation. Accordingly, it will be important to consider the following issues vis-à-vis offline functionality – transaction limit, the need to have a cap on offline transactions, rules for offline transactions, and risk-sharing between RBI and intermediaries.  

Use of Distributed Ledger Technology (DLT)

In terms of technical design, the RBI notes that the CBDC infrastructure could be based on a conventional centrally controlled database, or on a distributed ledger. Unlike centralised systems, where a single entity is responsible for controlling and updating the data on the transaction ledger,, there can be multiple entities which carry out such functions in a decentralised system, subject to the rules of the network. Due to this feature, it may be challenging for DLT systems to process a large volume of transactions as each participant has to confirm the transaction before the ledger is updated. 

Therefore, RBI notes that it may not be suitable to solely rely on DLT for the CBDC system and therefore suggests that some layers of the CBDC tech stack can be on a centralized system and the remaining on distributed networks. The RBI does not discuss further the pros and cons of DLT in the CBDC system and at this point, it may be assumed that the ultimate call on this issue will depend on pilot tests. Notably, Nigeria’s e-Naira which has already been launched relies on DLT. In any event, the use of DLT where for the entire system or for certain aspects, will require RBI to consider various issues relating to the governance of such DLT systems, including identification and eligibility of entities that can join the network, rights and liabilities of such parties and rules for the functioning of the network. The use of DLT must support important requirements of CBDC such as customer identification, permissioned payment networks, high-volume and value transactions, scalability, and privacy and confidentiality of user and transaction data. 

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