Central Bank Digital Currencies: The Centralized Alternative


Central Bank Digital Currencies: The Centralized Alternative

[This post has been authored by Sri Hari Mangalam, a student at the West Bengal National University of Juridical Science.]


The Supreme Court recently lifted the blanket ban imposed by the Reserve Bank of India on the use of cryptocurrency exchanges in the country. The Court held that digitized currencies present no visible damage to the RBI’s entities and should not be outrightly banned. Since the Supreme Court’s verdict, the RBI has moved away from its 2018 stance and towards one which favors digital currencies. However, the RBI’s idea of a digital currency is quite different from the ones that have gained popularity over the past few years. Cryptocurrencies such as Bitcoin, Ethereum, and more recently Dogecoin, while easy to use, do not provide the stability that the country’s premier economic institution requires. Alternatively, the RBI wishes to introduce a digital payment(s) having the Central Bank’s stamp, i.e., a centralized digital currency. Central Bank Digital Currencies (or “CBDCs“) are meant to be an alternative to the currently decentralized mediums and have already seen global acceptance. China has introduced a Digital Yuan; the Central Bank of Uruguay uses a CBDC called e-peso while the United Kingdom has created a CBDC task force to explore the possibility of introducing a digital token. India, too, seems to have a favorable stance towards CBDCs; however, implementing such a large-scale economic tool in a country with a billion-strong population (without China’s steel grips) is easier said than done. This paper, thus, aims to provide an overview of the idea of CBDCs, analyze its feasibility as a digital alternative, and study the possibility of incorporating such implementation in India.

A Centralized Currency and its Types

CBDCs are simply digitized cash, i.e., an electronic version of the physical money produced by a country’s central bank. The bank of England, in March last year, published a discussion paper centered around CBDCs and the various new opportunities that the medium presents. The paper defined digitized currency as a way to make payments and store value while dividing it into two separate forms. One where the large commercial banks, which have deposits with the central banks, would exclusively use CBDCs and the other form where individuals and citizens would have direct access to the digital tokens. The former is termed the wholesale model and the latter is its retail version. Accordingly, the model which a country chooses to adopt will depend on its objectives. For instance, if a country wishes to promote a cashless society and encourage financial inclusion, then it may adopt the retail model. However, if a country’s goal is to promote cross-border trade without necessarily emphasizing interest accruements, then the wholesale model may be a better choice. Most developing nations like India give a lot of importance to financial inclusion and, therefore, prefer the retail model.

Moreover, the type of model a country chooses will influence the system it eventually adopts. If a country decides on the retail model, then it will have a choice between a token-based and an account-based system. The token-based system is where reliance is placed on the payee’s ability to verify the viability of the payment instrument; whereas, the account-based system emphasizes the participants’ ability to verify the identity of the account holder. A choice between the two systems will depend on the prevailing practices of a country and whichever form is easier to implement. The Central banks will also have an option to choose between a direct or a tiered model. In the case of a direct model, the Central Bank will act as the sole issuer and controller of CBDCs; whereas, in a tiered model the Bank can choose to delegate some of its work to the Commercial Banks such as user access requirements, value-added services, etc.

Accordingly, the inclusion of CBDCs in a country’s financial system clubbed with the various options available to do so seems prima facie uncomplicated; however, the viability of a digital currency has various pros and cons which must be analyzed before making it a part of the economic structure.

CBDCs: A Viable Alternative?

Numerous countries have either chosen to adopt a CBDC or are conducting extensive research in this field. Digitized currency is seen as a primary transaction medium of the future while ensuring easy access to all users. Introducing a CBDC, however, comes with its own problems. Nevertheless, before delving into these, it is imperative to discuss the advantages of a medium like this and study why most surveyed jurisdictions have a positive stance towards digital tokens.

Proponents of digitized currency argue that CBDCs are the pathway to ensuring financial inclusivity and stability. They see it as a medium of increasing trade and promoting access to banking facilities. CBDCs present an opportunity to create a cashless economy with easy-to-use mediums. Most developed nations like Finland, Sweden, and the United Kingdom are largely cashless while developing nations like India are gradually reducing the emphasis on a cash-based system. A cashless structure is much more convenient for individual users and CBDCs are a stable medium to introduce such a format.

Moreover, CBDCs work on well-handled systems which, in many ways, have the potential to support financial inclusivity. A majority of the Indian population, as well as the global population, remains out of the banking system and as a result, is excluded from the financial system. However, CBDCs offer a more convenient and easy alternative as anyone with a mobile phone and an internet connection can utilize banking features, and, thereby, become a part of the financial system.

CBDCs can, further, help smoothen cross-border trade. Centralized tokens not only digitize money but digitize the identity behind it, as well. CBDCs allow different countries to work on set data standards and configuration systems which makes the movement of money across borders much easier. A digital token with set procedures is more convenient as compared to cash or other conventional mediums.

In the case of a retail model, with an increase in demand for CBDCs, a country’s commercial banks may be adversely impacted. Citizens would shift from bank deposits to CBDCs and, to remain competitive, commercial banks would have to offer higher rates of interest provided on their deposits. In such a situation, to maintain their profit margins, the banks will have to increase the cost of credit, making it more difficult to get a loan.

CBDCs also present a threat to individual privacy as they make it easier for governments to practice surveillance. Cash transactions provide a certain level of privacy; however, CBDCs would leave digital footprints making it far easier to track everyone involved. This may curtail illegal activities; however, it will also act as a serious impediment to an individual’s right to be forgotten. Additionally, as easy as it will be for the government to track individuals unless adequate cybersecurity measures are employed, various anti-social elements will be able to misuse the CBDC system as well. This economic implement will be subject to multiple malware attacks, frauds, and hacking attempts creating a high-risk atmosphere for citizenry data.

Accordingly, employing CBDCs involves a mixed bag of elements. However, for the Indian subcontinent, certain issues take prominence over the others.

The Indian Outlook

India is set to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the Parliament. The government has, for a few years, tried to draft a possible bill to regulate cryptocurrencies in India. However, in order for it to pass an effective Act, it must cover certain ideas that are particularly important for the country.

One of the primary motives behind introducing CBDCs is to promote financial inclusivity. However, for CBDCs to bring an effectual change, the primary causes of exclusion in the financial system must be addressed. As per a 2019 RBI report, the key reasons behind India’s exclusive financial system are socio-cultural barriers, inadequate connectivity, illiteracy, etc., These impediments are proof that simply introducing CBDCs will not be enough and a range of reforms would be required. The government will have to conduct training workshops, run literacy camps, and ensure that cultural divides do not act as impediments against the new implementation. Ensuring financial inclusion would require a number of reforms over and beyond the introduction of a digital token.

Additionally, India has taken many steps to support digital payments. From providing 24-hour payment options at optimal costs to encouraging competition via the updated NPCI framework, the country has tried to create an optimal digital sphere. In such an environment, it is imperative to study whether the introduction of CBDCs will actually be able to bring any substantial change or not? A centrally backed token should be more than just another digital option, rather it should build on the existing framework and provide inclusive facilities, making CBDCs a desideratum.

Moreover, CBDCs can likely reduce financial crimes in the country. A digital token makes it easier to track payments and combat offenses like money laundering and tax fraud. However, in order to bring an effectual change, the CBDCs must incorporate high-security standards whilst ensuring transparency and traceability. A well-designed CBDC is necessary to reduce economic offenses.


Centrally backed digital tokens present multiple opportunities for both the country’s citizens as well as the economy; however, in order to introduce an effectively implemented currency, the government will have to ensure that the commercial banks are not adversely impacted, and individual privacy is respected. Moreover, ideas of financial inclusivity and efforts to curtail economic crimes would require inclusive reforms beyond the simple introduction of a token. CBDCs hold a lot of potential, but the way India chooses to implement these will define the end results.

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