Strategic Financial Management · Digital Finance

Cryptocurrencies and Central Bank Digital Currency (Digital Rupee)

Updated 11 October 2026 · Fact-checked

A cryptocurrency is a privately created digital asset that runs on a decentralised ledger and is secured by cryptography, with no issuer backing. A CBDC is digital legal tender issued by the central bank. To answer questions, compare issuer, legal status, value stability, technology, and risks, then give a conclusion.

Understand Cryptocurrencies and Central Bank Digital Currency

Start with money. Money works as a medium of exchange, a unit of account and a store of value. Digital forms of money try to do these jobs without physical cash.

Cryptocurrencies (such as Bitcoin) are digital assets created by private parties. Transactions are recorded on a shared ledger kept by many computers (a blockchain), and cryptography secures them. No central bank or government issues or guarantees them. Their supply is set by software rules. Bitcoin, for example, has a fixed maximum supply of 21 million units.

Crypto features: decentralised, pseudonymous, borderless, transferable around the clock, and transparent on the ledger. Crypto risks: extreme price volatility, no intrinsic cash flow, no issuer liability, hacking and wallet or key loss, fraud, use for money laundering, high energy use in proof-of-work systems, and weak investor protection. Because of this, most regulators do not treat them as currency.

In India, crypto is not legal tender. The Government has chosen to tax rather than ban it. These are called virtual digital assets (VDAs) in the tax law. Income from transfer of VDAs is taxed at a flat rate of 30%, with no deduction for expenses other than the cost of acquisition, and losses cannot be set off against other income. A tax deducted at source applies on transfer. Check the current Income-tax Act, 2025 provisions for exact section numbers and rates before the exam. Gifts of VDAs are also taxable in the receiver's hands in specified cases. Taxing VDAs does not make them legal tender.

A Central Bank Digital Currency (CBDC) is the digital form of a country's fiat currency, issued and backed by the central bank. The Reserve Bank of India calls its version the digital rupee (e₹). It is a liability of the RBI, just like a banknote, and one e₹ equals one rupee. It can be held in a digital wallet and used for payments. RBI has described two kinds: retail CBDC for the general public and businesses, and wholesale CBDC for settlement between financial institutions. It has run pilots for both.

Key contrast: UPI moves bank money between bank accounts. CBDC is itself central bank money. A crypto asset is neither. A CBDC has stable value, legal tender status and regulator oversight, while crypto has none of these.

Key rules to remember

Crypto vs CBDC: issuer: Crypto = private or decentralised, no issuer liability; CBDC = central bank liability; Issuer is the first and most tested difference.
Crypto vs CBDC: legal status: Crypto ≠ legal tender in India; e₹ = legal tender (digital form of the rupee); Taxation of VDAs does not give them legal tender status.
CBDC value: 1 e₹ = ₹1; CBDC is a one-to-one digital form of fiat currency, so it has no price volatility against the rupee.
Tax on VDA transfer: Tax = 30% × (Sale consideration − Cost of acquisition); Only cost of acquisition is allowed. No deduction for other expenses; losses are not set off against other income. Surcharge and cess apply as per law. Confirm rates in the Income-tax Act, 2025.
Types of CBDC: Retail CBDC (public) and Wholesale CBDC (financial institutions); Wholesale is mainly for interbank and settlement use.

How to solve Cryptocurrencies and Central Bank Digital Currency questions

Use this method for any theory, comparison or short case question on crypto and CBDC.

1Read the question and mark the command word: define, differentiate, discuss, advise or compute.
2Identify the instrument: crypto asset (VDA), CBDC, or a bank-based payment such as UPI.
3State the definition in one line, including the issuer and legal status.
4List features, then risks or benefits, in short bullets tied to the case facts.
5Add the Indian regulatory or tax position: not legal tender, VDA tax at 30%, e₹ issued by RBI.
6For a numerical tax question, compute gain as sale consideration less cost of acquisition only, then apply 30% and ignore losses elsewhere.
7Close with a clear conclusion or recommendation linked to the person's goal, such as payments, investment or settlement.

Quickest way: Five-point comparison grid

When to use it: Use it for differentiate or compare questions, and to eliminate MCQ options quickly.

Write five rows: issuer, legal status, value, technology or control, risk.
Fill crypto: private or decentralised; not legal tender; volatile; distributed ledger, no central control; high risk.
Fill CBDC: RBI; legal tender; fixed 1:1 with rupee; central bank controlled; low credit and volatility risk.
In MCQs, reject any option saying crypto is legal tender in India or that CBDC is volatile.
For tax numbers, subtract cost only and multiply by 30%.

Common mistakes in Cryptocurrencies and Central Bank Digital Currency

Calling CBDC just another cryptocurrency.
Both are digital and may use similar technology.
Fix: Remember that CBDC is central bank money and legal tender. A crypto asset has no issuer liability.
Saying crypto is banned in India.
Students mix up regulation, tax and prohibition.
Fix: Say it is not legal tender and not banned. It is taxed as a VDA and regulated through tax and anti-money-laundering rules.
Deducting brokerage, mining or other expenses when computing VDA tax.
Students apply normal business income rules.
Fix: Deduct only the cost of acquisition. No other expense is allowed.
Setting off a crypto loss against salary or business income.
Students assume general loss set-off rules apply.
Fix: VDA losses cannot be set off against other income, as stated in the law. Check the current Act for carry-forward rules.
Treating UPI and the digital rupee as the same.
Both are used through phone apps.
Fix: UPI is a payment system that moves bank deposits. e₹ is the currency itself, a central bank liability.
Listing only risks of crypto and ignoring features.
Students memorise only the warnings.
Fix: Give both: decentralisation, borderless transfer and transparency, then volatility, hacking and misuse.

Worked examples

Example 1

Meera, a Chennai investor, bought a crypto asset for ₹2,40,000 and sold it for ₹3,90,000. She paid ₹5,000 as exchange fees in total. Compute the tax at 30%, ignoring surcharge, cess and TDS.

Show the solution

Sale consideration = ₹3,90,000.
Cost of acquisition = ₹2,40,000.
Fees of ₹5,000 are not allowed as a deduction.
Gain = 3,90,000 − 2,40,000 = ₹1,50,000.
Tax = 30% × 1,50,000 = ₹45,000.

Answer: Tax is ₹45,000 before surcharge and cess. The ₹5,000 fee is not deductible.

Example 2

Differentiate between a cryptocurrency such as Bitcoin and the digital rupee issued by the RBI.

Show the solution

Issuer: Bitcoin has no issuer and is created through network software rules. The e₹ is issued by the RBI and is its liability.
Legal status: Bitcoin is not legal tender in India. The e₹ is legal tender and a digital form of the rupee.
Value: Bitcoin's price is highly volatile. One e₹ always equals ₹1.
Control and technology: Bitcoin is decentralised on a distributed ledger. The e₹ is centrally issued and controlled by RBI, whatever technology is used.
Risk: Bitcoin carries volatility, hacking and misuse risk, and has little investor protection. The e₹ carries no issuer credit risk, though it faces cyber and operational risk.
Tax and use: Bitcoin gains are taxed as VDA income at 30%. The e₹ is used for payments and settlement like cash.

Answer: Bitcoin is a private, decentralised, volatile asset that is not legal tender. The e₹ is RBI-issued legal tender with stable 1:1 value.

Exam tips

Expect MCQs on legal tender status, issuer, retail vs wholesale CBDC and the VDA tax features. Learn them as a short list.
In differentiate questions, use a table-style comparison on at least five bases and finish with a one-line conclusion.
For tax numericals, show gain, then 30% tax, and state that only cost of acquisition is deductible.
In case questions, link the answer to the person: a trader, a bank or a company holding crypto, and mention risks specific to them.
Check the latest rates and section numbers in the Income-tax Act, 2025 before the exam instead of quoting memory.

Practice questions from Digital Finance

Cryptocurrencies and Central Bank Digital Currency: frequently asked questions

What is the main difference between cryptocurrency and CBDC?

A cryptocurrency is privately created and not backed by any central bank, and its price is volatile. A CBDC is issued by the central bank as legal tender and is worth exactly one unit of the national currency.

Is cryptocurrency legal in India?

It is not legal tender, but it is not banned either. India treats it as a virtual digital asset and taxes gains at 30%, with TDS on transfers. Always check the latest rules.

What is the digital rupee (e₹)?

It is the RBI's CBDC, the digital form of the Indian rupee. It has retail and wholesale versions, and one e₹ equals ₹1.

Is the digital rupee the same as UPI?

No. UPI is a payment system that transfers money between bank accounts. The digital rupee is a form of currency issued by the RBI that you hold in a wallet.