India’s pilot CBDC: What considerations went into the making

The RBI plays the central role in India for issuing “clean and genuine notes”. Several factors have gone into the making of RBI’s CBDC or e-Rupee, the answer to Bitcoin and cryptocurrencies. The prime concern was security, given that this will be a national currency and the digital counterpart to the rupee.

What is e rupee?

After CBDC is formally launched, India will have three forms of rupee:

  • Paper rupee and coins
  • Electronic rupee as held in bank accounts and UPI wallets
  • CBDC or e-rupee, also called digital or virtual rupee

Is the e-Rupee based on blockchain?

As of now, it is not clear whether the e-rupee utilizes blockchain technology in any form, and whether it is like a stable coin or cryptocurrency. Most likely it is not.

RBI’s note on the ongoing retail pilot does not mention ‘blockchain’ anywhere. If the concept note on CBDC released earlier is to be read carefully, it marks out decentralized ledgers (DLT) as not affording the same level of security as a centralized system. But a DLT is not entirely ruled out by the concept note, and remains an option as part of the system due to its peer-to-peer features.

Says the note: “DLT could be considered for the indirect or hybrid CBDC architecture. Further, it may also be possible that some layers of the CBDC tech stack can be on centralized system and remaining on distributed networks.”

So, although it may use cryptography to encrypt and secure transactions, the CBDC is not a cryptocurrency like Bitcoin.

What considerations went into formation of e-Rupee?

The exact design and structure of the ongoing pilot CBDC for wholesale and retail is not known. However, the concept note issued by RBI sometime earlier has outlined various factors and options to consider while designing a CBDC.

Apart from trust, security and liquidity, the e-rupee system is supposed to ensure several things.

The CBDC should incorporate all aspects of physical money, like authenticity and issued by the sovereign.

It should be available for both retail and wholesale use (for settlements by banks, etc.) “Retail CBDC is an electronic version of cash primarily meant for retail transactions,” says the note.

Cryptocurrency like private money will undermine the system

Private money in the form of cryptocurrencies is avoidable. Says the note: “digital assets undermine India’s financial and macroeconomic stability because of their negative consequences for the financial sector.”

However, ‘India has always been a country that has fostered innovation and development in the area of payment and settlement systems.” For example, the RTGS, NEFT and IMPS platforms and UPI/BHIM.

No harm, co-existence, innovation

The concept note cites the BIS guidelines for CBDC several times. BIS is a global organization with over 60 central banks of the world as its members. The three basic principles are – do not harm (to banks), co-existence (with existing money), and fostering of innovation.

The design considerations are driven by “domestic circumstances”.

In terms of structure, there can be a direct, two-tier or hybrid structure, where e-Rupee can be distributed and managed just like cash, but the central agency will keep the records.

Interest paying or not

The e-rupee won’t carry any interest when held in a wallet. Out of six countries cited in the note, only two (Canada, Sweden) are currently un-decided, while four have a non-interest paying CBDC pilot.

Anonymity and tracking

Smally payments in cash are always anonymous, but larger payments today can be tracked. With CBDC, a similar approach may be taken.

Says the note: “Considering the potential risks associated with privacy and anonymity, the idea of complete anonymity in digital world is a misnomer. To what extent a Central Bank should allow spending in digital currency to be anonymous is an open question. However, the principle of Managed Anonymity may be followed i.e., “anonymity for small value and traceable for high value,” akin to anonymity associated with physical cash. The importance of protecting personal information and data privacy needs to be considered to foster usability and wider adoption.”


Says the note: “A token based CBDC may be issued either with minimum value or fixed denominations akin to existing physical currency denominations.”

Offline use

The e-rupee is supposed to be inclusive, and so offline use is expected to be a feature. Three other countries are exploring the offline use of their potential CBDC (China, The Bahamas, Canada).

The note cites Japan’s exploration of using a chip on the SIM card, and Visa’s Offline Payment System. Visa’s system, the note says, does not address the problem of “double spending” – using the same digital coin simultaneously to send to many recipients.

Even in an offline use case, the note says there may be need to have intermittent power and some data connection to sync with the central ledger.


If an e-rupee wallet is lost for any reason, can the money or the wallet be recovered?

In account-based CBDC (for wholesale uses), the identities of the two parties will be known and thus recovery is possible. For token based (retail) use cases, two options may be available: wallet maintained by a custody provider or issuer (recoverable), and wallet maintained only by the user with private keys or PIN (not recoverable).

Integration with existing payment platforms

Says the note: “An Indian CBDC should be able to utilise the current payments infrastructure like UPI, digital wallets like Paytm, Gpay etc.”

Cross-border payments

It is not clear if retail individuals may expect a facility for sending remittances home with the CBDC. For wholesale, inter-bank settlements, the note cites two projects: BIS innovation hub project, and Project Dunbar.

As per BIS website: “Multiple CBDC (multi-CBDC) arrangements that directly connect jurisdictional digital currencies in a single common technical infrastructure offer significant potential to improve the current system and allow cross-border payments to be immediate, cheap and universally accessible with secure settlement.”

The concept note includes several other factors that have been or need to be addressed – energy consumption, speed and scaling, programming through smart contracts (for use in agriculture credit), cybersecurity (use of quantum secure algorithms), security against hacking and loss of tokens, no single point of failure, etc.

Data analytics or Big Data will also be an integrated feature after considering issues of anonymity and confidentiality.

The full concept note from RBI on CBDC can be accessed here:

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