Central Bank Digital Currency (CBDC) in India: A Comprehensive Report

India's Digital Revolution

Global Digital Economy Growth

The global digital economy is growing quickly, currently contributing over 15% to global GDP and expanding 2.5 times faster than the physical economy. India is playing a key role in this trend, with its digital economy contributing 10% to its GDP and expected to reach 20% by 2026. This growth is boosting India's domestic economy and strengthening its position in the global digital landscape.

Expanding Internet Access

India's internet access has surged, with a 55% penetration rate in 2023, driven by 199 million new users in three years. The country’s low data costs-₹13.32 per GB, the lowest globally-make internet access affordable. This has led to an average data usage of 24.1 GB per user per month in 2023, emphasizing India’s commitment to building an inclusive digital ecosystem.

Rise in Smartphone Users

Smartphones are central to India’s digital expansion, with around 750 million users in 2023, projected to reach 1 billion by 2026. Smartphones are the primary digital access point for many Indians, especially in rural and semi-urban areas, fueling growth in the digital economy.

FinTech and Digital Payments Growth

India’s FinTech industry is rapidly expanding, with $2.6 billion in funding in 2023. The UPI has transformed digital payments, handling 80% of all digital transactions in India and reaching a record over 15 billion transactions in Sep 2024 alone, with a total of approximately 134 billion transactions in the 2023-24 fiscal year. Digital payments have grown at a compound annual rate of 50% in transaction volume over the past 7 years, making India a leader in digital payments.

Financial Inclusion and Jan Dhan Accounts

India has made major strides in financial inclusion through the Pradhan Mantri Jan Dhan Yojana (PMJDY), which has opened 52.5 crore Aadhaar-linked bank accounts, with over 50% belonging to women and 67% in rural areas. Direct Benefit Transfers (DBTs) ensure government aid directly reaches beneficiaries, minimizing leakage and boosting financial inclusion. In 2023-24, DBTs reached 176 crore beneficiaries, distributing ₹6.9 lakh crore.

Strengthening Digital Infrastructure

India has built a robust digital infrastructure, including systems like India Stack, Aadhaar, UPI, and Digilocker. These tools support various services and enhance financial inclusion. The rollout of 5G has significantly improved connectivity, increasing median mobile download speeds from 1.3 Mbps in 2014 to 107.03 Mbps in 2024. BharatNet has connected over 2 lakh rural panchayats, providing access to e-health, e-education, and e-governance services.

Advancements in Digital Authentication and Lending

India has streamlined access to services through digital authentication, with over 116 billion Aadhaar-based authentications and 20 billion electronic Know Your Customer (e-KYC) verifications. The digital lending ecosystem is also expanding, with FinTech and BigTech companies collaborating to improve access to credit for individuals and businesses.

Data Protection and Cybersecurity

To address privacy concerns, India passed the Digital Personal Data Protection Act (DPDP Act) in 2023, giving users more control over their data. However, cybersecurity challenges are rising with digital expansion, highlighting the need for robust protective measures.

International Collaboration and Service Exports

India's Digital Public Infrastructure model is gaining international recognition, with efforts to connect UPI with other countries' payment systems. Digital trade is expected to be a significant contributor to India's GDP by 2030, as India leverages its digital infrastructure to access global markets.

The Concept of CBDC

Central Bank Digital Currency (CBDC) is a digital form of a country's fiat currency, issued and regulated by the central bank. Unlike cryptocurrencies, which operate on decentralized networks and are not backed by any central authority, CBDCs are centralized and represent a direct claim on the central bank.

CBDCs can be designed for various use cases, including retail payments (for use by the general public) and wholesale payments (for use by financial institutions). The design and implementation of CBDCs vary from country to country, depending on the specific goals and requirements of the central bank.

In the traditional financial system, when you have physical cash, like bills and coins, that is considered the currency issued by the central bank. With a CBDC, the central bank creates a digital version of that currency that can be used for transactions and payments, just like you would use physical cash or a debit/credit card.

When you hold a CBDC, you essentially have a direct claim on the central bank, just like when you hold physical cash. The central bank is responsible for issuing the CBDC and maintaining its value, similar to how they manage the paper currency.

For consumers, it offers a convenient way to make payments, similar to using mobile payment apps or credit cards, but with the added security of being backed by the central bank. For businesses, CBDCs can streamline payment processes, reduce transaction costs, and minimize the risks associated with handling large amounts of cash. Governments can also benefit by gaining more efficient means of distributing funds, such as in the case of welfare payments, and by having better control over the money supply.

Central Bank Digital Currencies (CBDCs) can take on various forms, each tailored to meet specific objectives within a nation's financial system. These forms differ primarily in their intended use cases, the parties involved in their distribution, and the underlying infrastructure needed to support them. Below is a more detailed exploration of each type of CBDC.

Retail CBDC: Designed for the general public, similar to physical cash, to provide a digital alternative for everyday transactions. Accessible through digital wallets, with the goal of improving financial inclusion and offering a secure, convenient, and efficient digital payment option.
Wholesale CBDC: Designed for financial institutions to facilitate high-value, interbank settlements and transactions. Can improve the efficiency and speed of interbank settlements, potentially reducing the need for intermediaries and associated costs.
Hybrid CBDC: Combines elements of retail and wholesale CBDCs, allowing use by both the general public and financial institutions. Can provide the benefits of improved financial inclusion and efficient interbank settlements, but the design and implementation can be more complex.
Indirect CBDC: The central bank issues the CBDC, but it is distributed and managed through intermediaries, such as commercial banks. Can leverage the existing financial system and infrastructure, but may raise privacy concerns due to intermediary involvement.
Direct CBDC: The central bank provides CBDC accounts and digital wallets directly to the public, without intermediaries. Can offer greater privacy and control, but may require significant investment and infrastructure development by the central bank.

Global Trends

Increased Exploration

As of May 2024, 134 countries and currency unions are actively exploring Central Bank Digital Currencies (CBDCs), covering 98% of global GDP. This marks a significant increase from 35 countries in May 2020.

Advanced Development

Status: 68 countries have moved beyond initial exploration to advanced stages of CBDC development, which includes piloting or launching digital currencies. Examples: This includes countries like Brazil, India, and Australia, which are testing or have partially rolled out their digital currencies.

G20 Engagement

Involvement: Out of 20 G20 countries, 19 are actively exploring CBDCs. Eleven of these are in the pilot stage. Key Players: Major economies such as Brazil, Japan, and China are leading in the development and testing of CBDCs, highlighting their strategic importance.

Fully Launched CBDCs

Current Launches: The Bahamas, Jamaica, and Nigeria have fully implemented their CBDCs, with operational systems for everyday transactions. Issues: The Eastern Caribbean Currency Union's DCash faced technical difficulties leading to a temporary halt and a reevaluation of its implementation strategy.

Growing Number of Pilots

Ongoing Trials: There are currently 36 active CBDC pilot programs globally, with notable projects including the digital euro, which is in a two-year preparation phase set to conclude in 2026. Focus: These pilots aim to test various use cases and integration with existing financial systems to gauge feasibility and effectiveness.

In most countries with advanced CBDC projects, the digital currencies are intermediated, meaning they are distributed through banks, financial institutions, and payment service providers.

However, China's digital yuan (e-CNY) also has an option for direct CBDC access, where users can access the currency directly through a central bank app. China's digital yuan (e-CNY) is the world's largest CBDC pilot, with 260 million wallets across 25 cities. Since 2022, it has been used in a range of settings, from public transportation to healthcare and even for buying crude oil. In 2024, the pilot is focused on optimizing the e-CNY for use by overseas tourists and expanding its cross-border applications.

The BRICS countries (Brazil, Russia, India, China, and South Africa) are all in the pilot phase of CBDC exploration, and are also collaborating on developing an alternate payments system to the US dollar.

Since Russia's invasion of Ukraine and the resulting sanctions, there has been a surge in the development of cross-border wholesale CBDC projects. These allow for the transfer of digital currencies between countries.

One example is the mBridge project, which connects China, Thailand, the United Arab Emirates, and Hong Kong. This project will expand to 11 more countries in 2024.

India's Approach

Wholesale CBDC and Retail CBDC

The implementation of CBDC in India began with the launch of pilot programs for both wholesale (CBDC-W) and retail (CBDC-R) use cases. The pilot programs were designed to test the technical and operational aspects of the CBDC, as well as to assess its impact on the broader financial system.

The wholesale CBDC (CBDC-W) pilot focused on the use of the Digital Rupee for large-value interbank transactions and settlement of government securities. This pilot aimed to enhance the efficiency of the financial markets by providing a real-time, secure, and cost-effective settlement mechanism. The wholesale CBDC pilot was conducted in collaboration with select banks and financial institutions, which participated in the program to assess the benefits and challenges of using the Digital Rupee for wholesale transactions.

The retail CBDC (CBDC-R) pilot, on the other hand, focused on the use of the Digital Rupee for everyday transactions by the general public. This pilot aimed to test the usability and adoption of the Digital Rupee among consumers and merchants. The retail CBDC pilot was conducted in collaboration with select banks, fintech companies, and merchants, who participated in the program to assess the benefits and challenges of using the Digital Rupee for retail payments.

The pilots have offered key insights into frameworks essential for full-scale CBDC deployment and future policy refinement. As of June 2024, India's retail CBDC pilot has shown promising results, with over 5 million users and 420,000 merchants participating nationwide.

User feedback from the pilot program has highlighted the convenience and speed of transactions using the Digital Rupee, with many users expressing satisfaction with the ease of use and the ability to conduct transactions without the need for physical cash. The offline functionality of the Digital Rupee has also been well-received, particularly in areas with limited internet connectivity.

Merchants participating in the pilot program have reported a positive experience with the Digital Rupee, citing the benefits of reduced transaction costs, faster settlement times, and the ability to attract new customers who prefer digital payments. The pilot program has also revealed some challenges, such as the need for greater awareness and education among users and merchants, as well as the need to address cybersecurity concerns.

Comparison with Global CBDC Initiatives

India's approach to CBDC is consistent with global trends, with several countries exploring or piloting their own digital currencies. The Chinese Digital Yuan, for example, has been widely tested across multiple cities, with millions of users participating in pilot programs. China's CBDC initiative has focused on retail payments, with a particular emphasis on integrating the Digital Yuan with existing payment platforms like Alipay and WeChat Pay.

Sweden's e-Krona pilot has focused on both retail and wholesale use cases, with a particular emphasis on testing the technical and operational aspects of the CBDC. The e-Krona pilot has also explored the potential for cross-border payments, with the aim of enhancing the efficiency and speed of international transactions.

The Bahamas' Sand Dollar, one of the first CBDCs to be fully implemented, has focused on promoting financial inclusion and providing a secure and efficient payment option for the country's residents.

Future Prospects of Digital Payments and CBDC in India

Projected Growth of Digital Payments

The government's focus on promoting digital payments, along with the increasing availability of smartphones and internet access, is expected to further accelerate the growth of digital payments in the country. By 2025, it is projected that digital payments will account for over 80% of all transactions in India, with UPI remaining the dominant platform.

The growth of digital payments is also expected to be supported by the development of new payment solutions and technologies, such as contactless payments, QR codes, and biometric authentication. These innovations will provide consumers with more options for making payments and managing their finances, further driving the adoption of digital payment methods.

Potential for Full-Scale CBDC Implementation

The successful implementation of the pilot programs for the Digital Rupee has paved the way for the potential full-scale implementation of CBDC in India. The lessons learned from the pilot programs will be critical in shaping the future of the Digital Rupee, including its design, distribution, and use cases.

The full-scale implementation of CBDC has the potential to revolutionize the financial landscape in India, offering new opportunities for innovation, financial inclusion, and economic growth. The Digital Rupee could become a key component of India's digital economy, providing a secure, cost-effective, and accessible digital currency option for all citizens.

However, the full-scale implementation of CBDC will require careful planning and coordination between the central bank, government, and other stakeholders. This includes addressing the challenges and risks associated with CBDC, as well as ensuring that the Digital Rupee is designed in a way that meets the needs of all users, including the unbanked and underserved populations.

Role of Government and Regulatory Bodies

The government and regulatory bodies will play a critical role in the future of digital payments and CBDC in India. The government's commitment to promoting digital payments and financial inclusion will be key to driving the continued growth of the digital payment ecosystem.

The Reserve Bank of India (RBI) will also play a central role in the development and implementation of CBDC, ensuring that the Digital Rupee is designed and regulated in a way that promotes financial stability, security, and innovation.

The RBI will need to work closely with other stakeholders, including banks, fintech companies, and consumers, to ensure the successful implementation of CBDC.

The development of a comprehensive regulatory and policy framework will be critical to the future of digital payments and CBDC in India. This includes establishing clear guidelines on the use of digital payments and CBDC, as well as addressing issues related to consumer protection, data privacy, and cybersecurity.

Learnings from Expert Opinions

Foundation and Potential for Financial Inclusion: India's existing digital infrastructure, including the JAM trinity and UPI, provides a strong foundation for CBDC implementation. Many experts view CBDCs as a powerful tool for enhancing financial inclusion, potentially bringing millions of unbanked and underbanked Indians into the formal financial system. This could democratize access to financial services, especially in rural and remote areas.
Wholesale vs. Retail CBDCs: There's a clear distinction in expert opinions regarding wholesale and retail CBDCs:
- Wholesale CBDCs are seen as having more immediate and transformative potential. They could significantly improve interbank settlements, enhance monetary policy transmission, and revolutionize cross-border payments.
- Retail CBDCs, while offering benefits, are perceived as facing more significant adoption challenges due to the public's familiarity with cash and recent adoption of UPI.
Privacy and Security Concerns: A major recurring theme is the tension between the benefits of CBDCs and privacy concerns:
- CBDCs enable real-time tracking of financial transactions, raising concerns about surveillance and individual privacy.
- Experts stress the critical role of privacy-enhancing technologies like zero-knowledge proofs and homomorphic encryption in addressing these concerns.
- Striking the right balance between transparency and privacy is seen as crucial for public acceptance and ethical implementation.
Economic Implications: Experts highlight several potential economic impacts of CBDCs:
- Reduced costs for borrowing and lending
- Increased velocity of money
- Potential formalization of a significant portion of India's informal economy
- Improved tax collection and economic data for more effective policymaking
Challenges and Risks: Several challenges and risks were identified:
- Potential disruption to the traditional banking sector
- Need for extensive public education and awareness
- Cybersecurity risks and the need for robust infrastructure
- Concerns about programmable money and potential for financial control
Global Context and Opportunities: Experts view CBDCs as an opportunity for India to:
- Lead in the global financial system
- Improve cross-border transactions and remittances
- Potentially offer an alternative to dollar dominance in international trade
- Foster economic cooperation within BRICS and G20 nations
- Enhance India's digital diplomacy and tech exports
Integration with Emerging Technologies: Many opinions highlight the potential synergies between CBDCs and other emerging technologies:
- Blockchain and distributed ledger technologies for enhanced security and transparency
- AI for improved efficiency and fraud detection
- Integration with the broader Web3 ecosystem
- Smart contracts for programmable money and automated financial operations
- Integration with Digital Public Infrastructure (DPI) to create a comprehensive digital economy
Regulatory and Governance Considerations: Experts emphasize the need for:
- A robust regulatory framework
- Clear governance structures
- Balancing oversight with innovation to prevent stifling growth
- Addressing concerns about money laundering and illicit activities
- Developing international standards for CBDC interoperability
Phased Implementation and Experimentation: Several opinions suggest a cautious, phased approach to CBDC implementation:
- Starting with wholesale CBDCs before moving to retail
- Conducting thorough pilots and experiments
- Learning from global experiences and best practices
Balancing Innovation and Stability: A key theme is the need to balance innovation with financial stability:
- Leveraging CBDCs for modernization while maintaining the stability of the financial system
- Ensuring CBDCs complement rather than disrupt existing successful systems like UPI
- Mitigating potential risks to the traditional banking sector
- Addressing concerns about digital bank runs and impact on monetary policy
- Exploring the role of CBDCs in enhancing overall financial system resilience
- Considering the implications for credit creation and the broader economy