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Understanding CBDCs and exploring a use case in Indian context

CBDCs, or Central Bank Digital Currencies, are digital versions of a country's fiat currency that are issued and controlled by the country's central bank. Unlike cryptocurrencies such as Bitcoin, CBDCs are backed by the full faith and credit of the issuing country's government and are intended to function as a digital version of cash.

CBDCs are still in the experimental phase in many countries, and the legal status of CBDCs varies from country to country. In some countries, CBDCs have been explicitly authorized by law, while in others, their legal status is unclear or they are expressly prohibited.

For example, the People's Bank of China has been experimenting with a digital version of its currency, the yuan, and has authorized certain pilot programs in various cities. In the United States, the Federal Reserve has not yet authorized the issuance of a CBDC, but it has stated that it is exploring the possibility.

Indian Central Bank Digital Currency (CBDC) is a digital form of legal tender issued by the Reserve Bank of India, which is the same as a sovereign currency and is exchangeable one-to-one at par with the fiat currency. It is intended to provide an additional option to the currently available forms of money, and will be substantially not different from banknotes, but being digital it is likely to be easier, faster and cheaper. It also has all the transactional benefits of other forms of digital money. The Reserve Bank of India plans to launch the Digital Rupee (e-Rupee) by the end of 2023, with a wholesale pilot launched on November 1, 2022 and a retail pilot launched on December 1 in four cities, but now extended to 15 cities. The main purpose behind the issuance of this Central Bank Digital Currency is to create awareness about CBDCs in general, and to make the monetary and payment systems more efficient.

The legal status of CBDCs will depend on the specific laws and regulations of each country, as well as the legal framework established by the central bank that issues the CBDC. As CBDCs become more widely used and accepted, it is likely that countries will develop specific legal frameworks to regulate their use and address any legal issues that may arise.

In addition to their legal status, CBDCs raise a number of legal and regulatory issues that will need to be addressed by governments and financial regulators. These include issues related to privacy and data protection, consumer protection, financial stability, and money laundering and terrorist financing.

For example, the use of CBDCs could potentially provide the central bank with unprecedented access to personal financial data, raising concerns about privacy and data protection. Similarly, the use of CBDCs could lead to new forms of financial fraud and scams, requiring the development of new consumer protection regulations.

At the same time, CBDCs have the potential to enhance financial inclusion and reduce the costs and inefficiencies associated with traditional banking and payment systems. CBDCs could also provide governments with greater visibility into the flow of funds within the economy, making it easier to combat money laundering and terrorist financing.

Overall, the legal status of CBDCs is still evolving, and it is likely to take some time before they are widely adopted and regulated. As CBDCs become more common, it will be important for governments and regulators to develop legal frameworks that balance the potential benefits of CBDCs with the need to address the legal and regulatory challenges that they pose.

"The Reserve Bank of India (RBI) has issued a concept note on Central Bank Digital Currency (CBDC) on October 7, 2022. The Note is accessible at RBI’s website ( This was stated by Union Minister of State for Finance Shri Pankaj Chaudhary in a written reply to a question in Lok Sabha today.

The Minister state that the CBDC pilot launched by the RBI in retail segment has components based on blockchain technology.

Giving more information on the CBDC, the Minister stated that the RBI has launched pilots of CBDC in both Wholesale and Retail segments. The pilot in wholesale segment, known as the Digital Rupee -Wholesale (e₹-W), was launched on November 1, 2022, with use case being limited to the settlement of secondary market transactions in government securities. Use of (e₹-W), is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. The pilot in retail segment, known as digital Rupee-Retail (e₹-R), was launched on December 01, 2022, within a closed user group (CUG) comprising participating customers and merchants.

The Minister further stated that the RBI has identified eight banks for phase-wise participation in the retail pilot project. The first phase includes four banks, namely the State Bank of India, the ICICI Bank, the Yes Bank and the IDFC First Bank. Subsequently, another four banks, viz., the Bank of Baroda, the Union Bank of India, the HDFC Bank and the Kotak Mahindra Bank will participate in the retail pilot.

The Minister stated in response to another question that RBI has already rolled out a pilot in the retail version of the CBDC (e₹-R), on December 01, 2022. The e₹-R is in the form of a digital token that represents legal tender. It is being issued in the same denominations as the paper currency and coins. It is being distributed through financial intermediaries, i.e., the banks. Users will be able to transact with e₹- R through a digital wallet offered by the participating banks. Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). The e₹-R offers features of physical cash like trust, safety and settlement finality. Like cash, the CBDC will not earn any interest and can be converted to other forms of money, like deposits with banks.

On the other steps being taken by RBI for full operationalisation of CBDC include expanding the scope of the pilots gradually to include more banks, users and locations based on feedback received during the pilots, the Minister stated."-In PIB-

Use case discussion:

Currently, most of digital payment-based solutions have to go through the banks. The value chain for these payment systems is as follows:

Merchantà Merchant Bank (Acquirer)à Payment Networkà Customer Bank (Issuer)à Customer

I am proposing to eliminate the role of banks by leveraging the digital Rupee infrastructure recently introduced by the RBI through CBDC (digital wallet-based) technology. This would be a B2B plug-and-play product through which we would be able to trace the last-mile payments that are being made and leverage the data through account aggregator infrastructure at almost 0 costs with respect to commissions given to the banks.

Therefore, we would be able to kill 2 birds with one stone: reduce the dependency on the banking infrastructure and generate real-time last-mile spending data in data compliant manner.

Why improve the current situation:

· The digital payment businesses are struggling to be profitable because most of the fees that they charge go to the banks for processing payments.

· The banking infrastructure has been ingrained in the system leading to slower processes and higher compliance. The transaction shall be as seamless as the cash transaction.

· The data is commoditized because of account aggregator infrastructure and insights are limited.

What are the business pressures/case for improvement?

· The customers and merchants would benefit when they would be required to pay lesser amount of fees for their payments to be processed. This would be done using digital Rupee: digital manifestation of case using blockchain technology through the integration of CBDC technology.

· Digital payment solutions would not have to dependent and compete with the banks to acquire customers. They could be stand-alone entities that would not be governed by stringent and arbitrary terms of the banks.

· The exchange of domestic currency with foreign currency would also lead to reduced commission and exchange rate costs if the exchange happens between 2 CBDCs.

· Digital payment companies do not care about the banking partners but the processing of payments. Therefore, if the payments are correctly processed, and the costs are minimized, the objectives of the payment companies will not be hindered.

The figure above shows the average cost of transaction involved vs no. of intermediaries. This can be understood by the commissions in the housing sector as well. The need for property dealers and brokers was reduced with the advent of websites like, and property dealers had to reduce their commissions as well to sustain, and this happened because of the introduction of a mechanism to eliminate middlemen from property dealing.

What are the underlying operational issues/opportunities?

· When a payment solution is being made, the regulatory hurdles are high and lots of regulations are required to be complied with in order for the solutions to become viable. This leads to colossal compliance and operational costs for the companies. The CBDC implementation would standardize the regulatory thresholds and consequently reduce the operational and compliance costs.

· The banks make the process convoluted. Different banks have different compliances and different regulatory thresholds. They also charge different transaction fees which leads to worsening customer experience where they have to trade-off between the services and the fees charged by the banks. The opportunity using CBDC is that these fees can be substantially reduced without affecting the quality of services.

These could be resolved by removing the banks and providing true control of one’s money & transactions.

Scope and process being targeted for improvement:

Scope: The UPI replaced the requirement of Visa/ Mastercard to process online transactions. As mentioned, the value chain for the same is as follows:

Merchantà Merchant Bank (Acquirer)à Payment Networkà Customer Bank (Issuer)à Customer

From the value chain mentioned above, our value chain would change to the following:

Merchantà CBDC Payment Networkà Customer

This would reduce the value chain components ultimately benefiting digital payment solutions such as PayTM. This would also be like cash transactions over the internet pseudo anonymously. Amongst various other fees charged by the banks, following are the major fees that need to be considered:

· Bank commissions: The commissions charged over various transactions.

· Account closing fees: The fees charged by the banks when you close the bank account.

· Minimum account balance fees: The fees charged if you are not able to maintain a minimum account balance

· Inactivity fees: Money charged if you are not using your account for a long time.

· Maintenance fees: The money paid to the bank for allowing you to have a bank account with them.[1]

Using a blockchain-based CBDC solution would not only help in a more seamless experience for the customer giving them more control over their money (digital Rupee), but it would also help help avoid expenses mentioned above for the customer.

We are not improving the speed of transactions but focussing on the removal of intermediaries from between. Improving the process by removal of intermediaries would help the new businesses scale and introduce new business opportunities. These business models could be around the value that the banking sector provides, stake-based algorithm replacing FDs, foreign currency exchange, currency/ financial markets trading and easier access for businesses with respect to digital payment solutions.

Process: I am improving the step of processing of payments by eliminating the intermediaries ultimately benefitting the businesses. Adoption of this would also benefit the overall economy providing feeder data to the account aggregator infrastructure & eliminating black money.

This solution would also eliminate the transaction costs bourne by the clients ultimately leading to higher levels of customer satisfaction.


Measurable objectives being targeted:

Currently, cost per transaction to the digital payment solution provider is around 1% that goes as bank fees. It is especially true for B2B businesses where these organizations act as facilitators. We plan to bring this cost to around 0%. There are 2 main intermediaries involved, ie. Banks, but we want to reduce the intermediaries to 0.

Right now, banks also leverage that data to cross sell different products such as loans and credit cards. But using the new infrastructure, the banks would need consent to understand the pseudo-anonymous identity of the people making the transactions. Also, the money would not be controlled by any banking entity, but would be like digital cash where you would control what happens to your money.

Analysis and results : I conducted process analysis tied to the process described above. This was done by reading various online resources available on the RBI resources and going through the terms and conditions of different solution providers. As a result, I found that:

· The current solutions for online payments like Razorpay charge huge commissions to facilitate transactions. The banks charge huge commissions to maintain record, the cost of which is ultimately bourne by the end customer.

· The customer has privacy concerns and as customers become more aware about their privacy rights, they would tend to opt for the solutions that provide them with the same.

· The other costs and fees (discussed above) bourne by the customers is redundant and customers in many cases do not have an alternative for the terms and conditions imposed by the intermediaries.

· Huge markups are charged by banks while dealing with foreign exchange currencies. This greatly increases the cost of doing business. Regulated decentralized exchange in an open market trading CBDCs of various currencies (like INR, USD) would help mitigate these expenses.

Recommendations and next steps:

The CBDC technology is in the stage of infancy with various unknowns. It shall be considered as digital cash and solutions around this technology would make the next generation of fintech companies.

· The payment providers shall collaborate with RBI and hire a team of lawyers for compliance in order to get clearance to use CBDC tech stack. This would require the interplay of various regulations.

· The payment providers shall enact a new technical team who understand the blockchain technology and are able to implement digital-Rupee-based solutions.

· The company shall also put a think tank to understand what can be done with the new last-mile data. The company shall get competitive first mover advantage in at least one of the following:

o Merchant based B2C solutions.

o Foreign exchange.

o Data aggregator and privacy solutions.

The company shall perform separate analysis to target certain sectors regarding their viability.

This would, more likely than not, help the company achieve the stated objective.

By Siddharth Dalmia

The StartUp Sherpa


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