Token-Based CBDC

A Token-Based Central Bank Digital Currency (CBDC) represents a digital form of sovereign money issued by a central bank, where ownership and transfer are verified through possession of a digital token rather than through account-based identification. In the Indian context, a token-based CBDC forms an important part of the broader digital currency initiative, reflecting the country’s objectives of strengthening payment efficiency, enhancing financial inclusion, and modernising the monetary system. Its relevance spans banking operations, financial markets, and the overall structure of the Indian economy.
Unlike traditional bank deposits or account-based digital payments, a token-based CBDC functions similarly to physical cash in digital form. The holder’s control over the token establishes ownership, making it particularly suitable for retail transactions and peer-to-peer payments.

Concept and Meaning of Token-Based CBDC

A token-based CBDC is a digital representation of legal tender issued by the central bank, where transactions are validated based on the authenticity of the digital token rather than the identity of the account holder. In this model, value is embedded in the token itself, and payment finality is achieved through secure transfer of the token between users.
This approach contrasts with account-based CBDC systems, which require verification of the payer’s identity and maintenance of centralised accounts. The token-based model emphasises ease of use, anonymity to a limited extent, and cash-like characteristics, while still operating within a regulated digital framework.

Evolution of CBDC Initiatives in India

India’s exploration of CBDCs is driven by rapid digitalisation, growth in electronic payments, and the need to provide a sovereign alternative to private digital currencies. The Reserve Bank of India has been at the forefront of designing and piloting the digital rupee, with a focus on both wholesale and retail use cases.
The token-based CBDC model has been prioritised for retail applications, reflecting its suitability for everyday transactions. Pilot programmes have tested its use in consumer payments, merchant transactions, and offline scenarios, offering insights into its operational feasibility and economic impact.

Token-Based CBDC and the Banking System

In the banking sector, a token-based CBDC introduces a new form of central bank money accessible to the public. Commercial banks act as intermediaries in distribution, customer onboarding, and wallet management, while the central bank retains control over issuance and redemption.
This structure preserves the two-tier banking system, ensuring that banks continue to play a central role in financial intermediation. At the same time, token-based CBDCs can reduce settlement risk and transaction costs by enabling instant, final payments without reliance on multiple intermediaries.

Role in Payments and Financial Inclusion

Token-based CBDCs have strong potential to enhance financial inclusion in India. Their cash-like nature makes them accessible to individuals without traditional bank accounts, particularly when combined with offline functionality and low-cost digital wallets. This is especially relevant in rural and semi-urban areas with limited banking infrastructure.
By providing a safe and universally accepted digital payment instrument, token-based CBDCs can reduce dependence on cash while retaining its key advantages. This supports broader policy objectives of expanding digital payments and integrating informal economic activity into the formal financial system.

Implications for Monetary Policy and Financial Stability

From a monetary policy perspective, token-based CBDCs offer greater visibility into currency circulation and transaction patterns, enhancing the effectiveness of policy implementation. They can improve the transmission of monetary policy by facilitating faster and more direct flow of central bank money through the economy.
However, careful design is essential to mitigate risks to financial stability. Excessive migration from bank deposits to CBDCs could affect banks’ funding profiles. To address this, limits on holdings and non-interest-bearing features are often considered, ensuring that token-based CBDCs complement rather than disrupt the existing banking system.

Security, Privacy, and Technological Considerations

Security is a central feature of token-based CBDCs. Advanced cryptographic techniques ensure the integrity and authenticity of tokens, reducing the risk of counterfeiting and fraud. At the same time, design choices aim to balance user privacy with regulatory requirements such as anti-money laundering and combating the financing of terrorism.
Technologically, token-based CBDCs may operate on distributed ledger or other secure digital platforms. Scalability, interoperability with existing payment systems, and resilience against cyber threats are critical considerations in their implementation.

Impact on the Indian Economy

At the macroeconomic level, token-based CBDCs can enhance the efficiency of payments, reduce transaction costs, and support economic formalisation. Faster and cheaper transactions improve business efficiency, particularly for small enterprises and informal sector participants.
The introduction of a sovereign digital currency also strengthens India’s monetary sovereignty by providing a trusted alternative to private digital tokens and foreign payment platforms. This has long-term implications for economic resilience, innovation, and global competitiveness.