‘Cash with public at record high of ₹30.88 lakh crore’, was the headline of a recent news story in a prominent daily. The numbers testify India’s love for cash. The preference for cash or currency notes as a means of person-to-person payment is well accepted and long-established in India.

Post demonetisation, digitisation of payment transactions using network-centric solutions of bank(s) or other similar institutions has gained much popularity. UPI transactions have recorded a spectacular growth of 57 per cent in value and 73 per cent in volume terms over the last one year. The RBI’s digital payment index (DPI) has also shot up to 349.3 as of March 2022 compared with 270.6 in March 2021.

This should have significantly reduced public dependence on physical cash and as such expenditure on currency printing. However, RBI’s expenditure on printing of new currency notes continues to rise y-o-y. In the financial year 2021-22 alone, the RBI spent ₹4,984.8 crores as against ₹4,012.1 crore in the previous year on printing of banknotes. (RBI Annual Report).


The RBI’s recent sojourn with Central Bank Digital Currency (CBDC) is to reduce dependency on cash — well, somewhat. As it does normally, the RBI first published, in October 2022, a concept note on CBDC and later introduced CBDC in a controlled environment for transactions in wholesale — government securities market with nine banks as participants.

According to the concept note, the RBI is actively considering network dependent CBDC solution — a CLASS solution. It seems due diligence for network independent CBDC solution — a MASS solution — is yet to be ascertained/established.

Network dependent CBDC solutions are generally based on blockchain/distributed ledger technology (DLT) and will always require robust network infrastructure to undertake transactions, whereas network independent CBDC solutions generally do not require any type of services from communication service provider(s) for transactions.

CBDC could easily be adopted as a solution for “mass” with the following features and functionalities: it should be simple enough for even uneducated population to use; it should not depend on communication network; it should record and maintain all transactions for future tracking and monitoring; the government should be enabled to enforce a transaction limit for recording and monitoring them; and it should use finger print based/PIN based mechanism for security.

Presuming that “mass” is the central theme of CBDC solution, we analyse RBI’s main considerations as enshrined in CBDC concept note and suggest a way forward.

Design consideration

We suggest the following essential(s) in the proposed solution :

Cash/currency notes transactions are possible when both persons — sender and receiver — are within hand-shaking distance. Therefore, CBDC would be required to undertake transactions, when both are within hand-shaking distance.

Just as currency notes are never a part of any settlement system, no separate payment and settlement system is required for CBDC transactions either.

Various systems, already in place, will continue to support other type of transactions for payment and transfer.

To assign appropriate weightage(s) to various domestic circumstances, such as financial/literacy levels of users, diverse geographical terrains and availability of internet infrastructure.

When finally introduced, CBDC should have no divisions like CBDC-R and CBDC-W. Currently, no such bifurcation exists. The bifurcation could introduce avoidable complexity in payment and settlement operations.

No interest should be payable on CBDC holdings. “Cash in hand” does not earn interest anywhere.

To establish privacy for CBDC transactions. We need to understand that any CBDC solution would essentially be a digital solution. It is understood that any digital solution, by nature, would have capabilities of tracking and monitoring, even if the transaction is of the smallest amount. So the RBI would have to translate the relevant law(s) of the government into business rules and customise CBDC to have a privacy threshold beyond which tracking can be mandated.

With the above essentials in mind, the RBI would be able to address various design considerations listed in the concept note, given domestic circumstances. It has already decided to experiment in retail and wholesale space. Basis the experience gained in these experiments, it will have to decide whether CBDC holdings should be remunerated or non-remunerated and the degree of privacy.

Technology considerations

Undoubtedly, technology will play a crucial role in attracting “mass” towards CBDC solution. Some suggestions from the technological perspective for the RBI are:

CBDC solution must employ a secure, robust and user-friendly mechanism which is: multi-tiered: uses 3Ps approach — people product and process; and multi-Layered: distributed across different levels — manufacturing, RBI, commercial bank, and repository.

CBDC solution should be completely platform independent. Rather, CBDC solution must be able to make use of the available platform/technology architecture of the existing core banking applications deployed by banks.

Some of the basic functionalities of programmable money are already being taken care of by the existing core banking applications, such as standing instructions, account sweeping, automated bill payment, etc. Functionalities of programmable money would have to ensure that a few CBDC users may want to use these functionalities. The reach of the core banking applications would need to be enhanced to provide functionalities of programmable money rather than overloading CBDC platform with these functionalities.

Using industry standard financial message architecture for any financial interchange, CBDC solution would be able to integrate seamlessly with existing payment systems. Therefore, technically, it would be possible to achieve interoperability with any other payment device or system.

In short, CBDC solution would have to have strong security, should make use of existing platform/technology architecture providing basic functionalities of current payment system with interoperability to be widely used.Customer-centricity has always been central to RBI’s policy. It is expected that the RBI will continue with its people-centric policy while designing a CBDC solution which would bring the best experience to Indian masses.

Rath is a former central banker, and Sharma is a digital evangelist. Views are personal