Central Bank Digital Currency

Syllabus: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context

• The Reserve Bank of India proposed linking BRICS CBDCs on the agenda for the 2026 summit. The recommendation aims to improve cross-border payment efficiency amid rising geopolitical and trade tensions.

Background and BRICS Proposal

• The RBI suggested connecting BRICS digital currencies to ease international transactions among member countries.
• The proposal builds on the 2025 BRICS Brazil declaration promoting interoperable payment systems.
• The initiative could reduce reliance on the U.S. dollar in cross-border settlements.

About CBDC

• Definition and Legal Nature of CBDC
  • A CBDC is a digital form of sovereign currency issued by the central bank.
  • It appears as a liability on the central bank’s balance sheet.
  • The currency retains legal tender status equivalent to physical cash.
  • The RBI recognises CBDCs as part of the official monetary framework.
• Types of CBDCs
  • Wholesale CBDCs support interbank payments and settlement among licensed financial institutions.
  • They are used mainly for securities transactions and large-value financial transfers.
  • Retail CBDCs are accessible to the general public through digital wallets and mobile platforms.
  • Token-based models allow transactions using private and public key authentication.
  • Account-based models require digital identity verification for account access.
  • The DCash system of the Eastern Caribbean follows an account-based retail model.

• Potential Benefits of CBDCs
  • CBDCs promote financial inclusion for unbanked and under-banked populations.
  • They reduce transaction costs by eliminating multiple payment intermediaries.
  • Digital ledgers enable better transaction tracking, limiting corruption and tax evasion.
  • Central banks can enhance monetary policy transmission through direct digital transfers.
  • CBDCs improve cross-border payment efficiency by reducing dependence on international intermediaries.
  • Programmable payments allow conditional transfers with restrictions or expiration features.
• Challenges and Risks
  • Systems face cybersecurity threats, including hacking and data breaches.
  • Privacy concerns arise from extensive transaction tracking and identity verification.
  • The digital divide may exclude populations lacking technological access or literacy.
  • Differing DLT standards reduce efficiency in cross-border CBDC interoperability.
  • Preference for foreign CBDCs could threaten national monetary sovereignty.
• Way Forward
  • Zero-Knowledge Proof technologies can balance regulatory oversight with user privacy.
  • Governments should integrate CBDCs with Direct Benefit Transfers and welfare payments.
  • Regulatory sandboxes can test legal frameworks before nationwide implementation.
  • Global institutions like IMF and BIS can guide interoperability and international standards.