Central Bank Digital Currencies Are Redefining Digital Money

The introduction of CBDCs will necessitate a thorough examination of a jurisdiction’s regulatory framework.

Tech and Auto
4 min read
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The Reserve Bank of India (RBI), in a forward-looking move, decided to extend the pilot program for the digital rupee. This extension reflects the central bank’s commitment to exploring and harnessing the potential of central bank digital currencies (CBDCs). The digital rupee pilot program, which initially began as a controlled experiment, has gradually gained momentum and positive feedback from participants and stakeholders alike.

Digital innovation is revolutionising the way individuals manage their money. Modern economies are tilting toward digital economies. Private players who dominate the digital payments market have simplified life for the world population with innovations like e-money, online transactions, mobile banking, and blockchain and Distributed Ledger Technology (DLT) based private currencies such as cryptocurrencies and stablecoins. However, private currencies like cryptocurrencies affect the central bank’s monopoly over creating base money which could affect financial stability and the monetary system.

To thrive in the current market, there is pressure amongst the jurisdictions to consider digital alternatives. Central Bank Digital Currencies (hereafter referred to as CBDCs) is one such alternative. CBDCs can be defined as a central bank liability, issued digitally by the central bank, and intended to serve as a new form of currency. The key principles for CBDCs are non-disruption, co-existence, innovation, and competition. These principles ensure the healthy functioning of the financial system and CBDCs simultaneously.  


Countries will have their own reasons for adopting CBDCs like an emerging economy would want accessibility to the unbanked population whereas advanced economies will have protective or defensive reasons.

The CBDCs will increase financial inclusion, enabling faster, traceable, and cheaper transactions, reducing cross-border transaction costs, and enhancing monetary policy (by allowing central banks to implement more effective monetary policies by providing them with greater visibility into the flow of money throughout the economy and could enable them to better manage inflation, stabilise the economy, and respond to financial crises), reduce the reliance on cash and improve transparency and security.

Overall, as they are issued by central banks of the countries they come with more trust and assurance as compared to cryptocurrencies. 

With the advent of CBDCs in modern economies, there are immense benefits that people will have as well as certain legal implications which must be dealt with to get CBDCs into mainstream economies. To accommodate CBDCs in the banking system amending the regulatory regimes of financial institutions and economic policies of the jurisdictions will be necessary.  

The design structure of the CBDCs is still being researched globally, however, there are certain jurisdictions that are frontrunning the CBDCs research and implementation like the Bahamian Sand Dollar, Digital Euro, Digital Dollar, China’s Digital Yuan, Digital Rupee, etc., 


The introduction of CBDCs will necessitate a thorough examination of a jurisdiction’s regulatory framework. It is most likely the first of many digital innovations that have the potential to affect the entire monetary system. As a result, such CBDCs must be backed by a solid foundation. The legal framework and all potential risks are outlined for it to gain widespread acceptance and can be accommodated in the economy. The legal implications include, firstly are CBDCs under the central bank law currencies or legal tender?  According to an IMF survey of its member banks, approximately 61% of central bank laws limit the authority of issuance of money or legal tender status to physical banknotes and coins.

Secondly, CBDCs can be accorded as the monetary unit of the Union? To implement a CBDC, necessary changes under the central bank and monetary law must be made for it to be supported by a clear legal framework that the public understands completely, as it is a trust-based instrument. Thirdly, the private law challenges pertaining to CBDCs will be the counterfeiting of CBDCs, anti-money laundering, and countering the financing of terrorism, a threat to consumer protection, risk to cyber-attacks, data privacy issues and impact on financial stability (CBDCs could potentially increase financial instability if they lead to large-scale shifts in capital flows or if they undermine the stability of traditional financial institutions).

It appears to be too early to make any judgments on the impact at this time, but based on preliminary observations, a tectonic shift in most nation’s existing financial regulations is required to accommodate a national CBDC.

Countries will have to consider fundamental issues arising from constitutional documents to grant legal status to CBDCs, followed by a thorough analysis of the potential implications for private law, as this is a new area of law that was not anticipated when the regulatory structure was developed.

From a legal standpoint, it is recommended that countries take a holistic approach in which they review their entire regulatory framework to accommodate the desired CBDC to avoid any regulatory gaps. The technology architecture of the nations must improve drastically to accommodate CBDCs. While nations can introduce CBDCs, however, it is pertinent to weigh the cost and benefits of getting it into the mainstream economy. In comparison to the cost payable on the same, there are already online modes of payment available, and while innovation is required, the trade-offs affecting the economy must be considered. Nations must decide whether CBDCs are necessary to this extent or whether a less destructive alternative can fill the same void. 

(Sanhita Chauriha is with Vidhi Centre for Legal Policy. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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Topics:  Digital Money 

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