Everything You Need to Know About Central Bank Digital Currency (CBDC)

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Banks have always been at the forefront of change, shaping the way economies grow and societies thrive. As the financial world steps into a new digital era, the emergence of Central Bank Digital Currency (CBDC) offers banks a unique opportunity to redefine their role. It’s not just about adapting to change but driving it - leading the way in innovation, security and inclusion. With CBDC, banks have the chance to build a future where finance is not only smarter but also more accessible for everyone.

What is Central Bank Digital Currency?

In India, the Central Bank Digital Currency (CBDC) is like digital cash, created by the Reserve Bank of India (RBI). It’s just like using money, but instead of notes or coins, it’s completely online. You can use it on your phone, computer or other digital devices, with the trust and safety of the RBI behind it.

How is it different from other digital payment methods? While UPI apps allow you to transfer money digitally, they rely on traditional bank accounts and intermediaries. CBDC, on the other hand, eliminates the middle layer. It’s a direct digital currency issued by the RBI, ensuring safety, stability and transparency.

There are two types of CBDCs

Retail CBDC: This is for everyday use by people and businesses. Whether paying for groceries or splitting a restaurant bill, a retail CBDC would work like cash but digitally.
Wholesale CBDC: It is designed for banks and financial institutions to settle large transactions. It makes the processes faster and reduces costs.

Why is CBDC important for India? It has the potential to reduce the country’s reliance on physical cash, which is expensive to print, transport and store. It also aims to make digital payments more secure, efficient and accessible, particularly in rural areas where traditional banking services may be limited.

By introducing CBDC, India is taking a significant step toward modernising its financial system, ensuring faster transactions, improving transparency and supporting the country’s growing digital economy.

How does Central Bank Digital Currency work?

Central Bank Digital Currency (CBDC) works as a digital form of currency issued and regulated by the Reserve Bank of India (RBI). It functions similarly to physical cash but exists purely in digital form and is stored in digital wallets provided by banks or authorised platforms.

CBDC doesn’t rely on bank accounts or intermediaries for transactions. It allows real-time payments directly between users or institutions, simplifying processes and reducing transaction costs. For banks, it transforms operations by enabling faster interbank settlements, reducing the reliance on clearinghouses and enhancing cross-border payments.

CBDC transactions are secure, transparent and managed through advanced technologies like blockchain or centralised ledgers. For banks, this represents a shift toward modernised financial systems while maintaining the trust and stability of traditional banking.

Top advantages of CBDC

Here are the key benefits of CBDC:

Ease of making transactions: CBDC makes sending and receiving money quick and easy. Payments happen instantly, without the usual delays of traditional banking processes. Whether for daily use or big transactions, it ensures smooth and hassle-free payments.
Improved payment speed and reach: With CBDC, money transfers happen faster, even across borders. It can also reach areas where banking services are limited. This makes it useful for people in remote or underserved regions.
Enhanced security and transparency: CBDC is built with strong security features to prevent fraud or hacking. Every transaction is recorded in a secure system, which makes it easy to track. This way, all financial activities are safe and transparent.
Less dependency on cash: CBDC reduces the reliance on physical money, which can be expensive to produce and risky to manage. It also helps avoid problems like counterfeit currency and theft, saving costs for banks and businesses.
Supports offline payments: CBDC can work even when there’s no internet, making it a reliable option during network issues or in places with poor connectivity. Thus, ensuring payments can continue without interruption.
Customised financial applications: CBDC can be set up for specific purposes, like government subsidies or grants. It makes sure the money is used exactly as planned. This helps reduce misuse and makes programs more efficient for banks and governments.
Broader financial inclusion: CBDC gives people a way to use digital money even if they don’t have a bank account. This makes it easier for those in rural or remote areas to be part of the formal economy. By connecting more people to digital payments, CBDC helps create a financial system that works for everyone.

What is the difference between e₹, cash, UPI and cryptocurrency?

Here is the difference between each of these payment methods:

Feature	Digital rupee (e₹)	Cash	UPI	Cryptocurrency
Issuer	RBI	RBI	Banks via NPCI	Decentralised
Form	Digital	Physical	Digital transfer	Digital
Backing	RBI	RBI	Bank accounts	None
Usage	Payments, savings	Offline	Transfer via apps	Trading and payments
Security	Highly secure	Counterfeit risk	Bank-dependent	Blockchain-secure
Regulation	RBI	RBI	RBI-supervised	Unregulated

Final note

The introduction of CBDC represents more than just a technological shift; it’s a reimagining of how money flows through the economy. For banks, it’s an opportunity to adapt, innovate and lead in a rapidly evolving digital landscape. As this transformation unfolds, staying ahead means embracing change, investing in the right tools and building trust with customers. The future of banking is being written today and CBDC is set to play a defining role in this new chapter.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.