Account-based CBDC

An account-based Central Bank Digital Currency (CBDC) is a form of digital sovereign money issued by a central bank and held in accounts maintained either directly with the central bank or through authorised intermediaries such as banks and payment service providers. In the context of banking, finance, and the Indian economy, an account-based CBDC represents a significant institutional innovation that blends traditional account-based banking structures with modern digital payment technology. It is designed to enhance payment efficiency, financial inclusion, and monetary policy transmission while preserving trust in sovereign currency.
Unlike token-based CBDCs, which rely on possession of a digital token, account-based CBDCs depend on identity verification and account ownership to validate transactions, closely aligning them with existing banking systems.

Concept and Definition of Account-based CBDC

An account-based CBDC functions on the principle that users hold balances in digital accounts denominated in central bank money. Transactions are authorised by verifying the identity of the account holder rather than by validating the authenticity of a digital token. This model resembles conventional bank accounts, except that the liability rests with the central bank rather than a commercial bank.
In this system, every transaction involves debiting one account and crediting another within the CBDC ledger, ensuring clear ownership, traceability, and regulatory oversight. The account-based structure is particularly suited to environments where strong identity frameworks and regulated financial institutions already exist.

Rationale for Adopting an Account-based Model

Central banks consider account-based CBDCs to address several structural challenges in modern financial systems. As cash usage declines and digital payments expand, central banks seek to retain a direct role in retail payments and ensure continued access to risk-free public money.
Key motivations for adopting an account-based CBDC include:

• Strengthening trust in digital payments through sovereign backing.
• Enhancing oversight and compliance with financial regulations.
• Improving the efficiency and resilience of payment systems.
• Supporting financial inclusion through low-cost digital accounts.

For emerging economies like India, the account-based model aligns well with existing banking infrastructure and regulatory frameworks.

Operational Structure and Transaction Mechanism

In an account-based CBDC system, users open digital currency accounts through authorised institutions, which may include banks or designated payment service providers. These entities act as intermediaries, handling customer onboarding, identity verification, and customer service, while the central bank maintains ultimate control over issuance and settlement.
The transaction process typically involves:

• Identity authentication of the payer.
• Verification of sufficient balance in the CBDC account.
• Real-time debiting and crediting of accounts on the central ledger.
• Settlement finality ensured by the central bank.

This structure enables high transaction security, auditability, and compliance with anti-money laundering and counter-terrorist financing norms.

Account-based CBDC in the Indian Context

In the Indian economy, an account-based CBDC fits naturally within the country’s bank-led financial system. India has a well-established framework of regulated banks, widespread digital payment adoption, and a strong identity and compliance infrastructure. These factors support the feasibility of an account-based digital rupee.
For the Reserve Bank of India, an account-based CBDC offers a controlled approach to digital currency issuance, allowing gradual integration with existing banking and payment systems. It also supports targeted policy objectives such as efficient government payments, welfare transfers, and enhanced monitoring of monetary flows.

Implications for the Banking Sector

The introduction of an account-based CBDC has important implications for banks. Since CBDC balances represent claims on the central bank, there is a possibility that customers may shift a portion of their deposits from commercial banks to CBDC accounts, particularly during periods of financial stress.
To mitigate this risk, central banks may impose balance limits or adopt a two-tier model where banks continue to play a central role in customer interaction. Banks can also leverage CBDC infrastructure to offer value-added services such as integrated wallets, programmable payments, and improved cross-border transactions.
Overall, the account-based CBDC model encourages banks to modernise systems while retaining their role in financial intermediation.

Impact on Payments and Financial Inclusion

An account-based CBDC can significantly enhance payment efficiency by enabling instant, low-cost, and reliable transactions. Settlement in central bank money reduces counterparty risk and enhances confidence in digital payments.
From a financial inclusion perspective, CBDC accounts can serve as entry-level digital accounts for individuals with limited access to traditional banking services. Simplified onboarding and minimal balance requirements can bring underserved populations into the formal financial system, particularly in rural and semi-urban areas.

Monetary Policy and Financial Stability Considerations

Account-based CBDCs have implications for monetary policy transmission. Since the central bank directly controls CBDC issuance and conditions, policy signals such as changes in interest rates or liquidity measures can be transmitted more effectively.
However, careful design is required to avoid destabilising the banking system. Measures such as non-interest-bearing CBDC accounts, tiered remuneration, or holding limits are often considered to balance innovation with financial stability.

Advantages of the Account-based CBDC Model

The account-based approach offers several advantages:

• Strong regulatory oversight through identity-based transactions.
• Reduced risk of illicit activities due to traceability and compliance controls.
• Ease of integration with existing banking and payment infrastructure.
• High consumer protection, with clear ownership and dispute resolution mechanisms.

These features make the model particularly attractive for jurisdictions prioritising stability and regulatory control.

Challenges and Limitations

Despite its strengths, the account-based CBDC model faces challenges. Maintaining large-scale digital accounts requires robust cybersecurity, high system availability, and effective data protection frameworks. Concerns regarding privacy and excessive transaction monitoring must be addressed to maintain public trust.
Additionally, ensuring accessibility for users with limited digital literacy or connectivity remains a key challenge, especially in a diverse economy like India.