Central Bank Digital Currency
Also written CBDC · Central Bank Digital Currency (CBDC) · CBDCs · Central Bank issued Digital Currencies
A digital representation of fiat currency issued by a central bank — expressly outside the scope of FIU-IND's AML/CFT/PF guidelines for virtual digital asset service providers.
In plain language
A central bank digital currency is money, not a crypto-asset. It is the government's own currency in electronic form.
The workbook mentions it for one reason, and that reason is a boundary. FIU-IND's AML, CFT and PF guidelines for entities providing services related to virtual digital assets (VDAs) set out what a VDA service provider must do. They then say what they do not cover: Central Bank issued Digital Currencies (CBDCs) are outside the scope of this guidance, because they are a digital representation of fiat currencies — and fiat currency is government issued currency that is not backed by a precious metal.
The logic is simple. The VDA guidance exists because VDAs sit partly outside the regulated money system. A CBDC is the regulated money system.
How it works
What the VDA guidance does cover. The guidelines, effective from 10 March 2023, apply to Service Providers (SPs) — persons carrying out, for another natural or legal person in the course of business:
- exchange between virtual digital assets and fiat currencies
- exchange between one or more forms of virtual digital assets
- transfer of virtual digital assets
- safekeeping or administration of VDAs or instruments enabling control over them
- participation in and provision of financial services related to an issuer's offer and sale of a VDA
Its focus. VDAs that are convertible to other funds or value — both those convertible to other VDAs and those convertible to fiat or that intersect with the fiat financial system.
Its purpose, in four parts: to understand and apply the risk based approach; to identify the entities conducting VDA activities, the SPs; to establish an efficient reporting mechanism against ML, TF and PF; and to help entities engaged in VDA activities understand and comply with their AML/CFT/CPF obligations under the PMLA and PML Rules.
Its strategy. Deterrence (effective KYC, CDD and EDD), detection (monitoring and suspicious transaction reporting) and record-keeping to support investigations.
Where CBDC falls. It is excluded from all of this as guidance, because it is a digital form of fiat. The same text places fiat currency on the other side of an SP's exchange business — an exchange that converts a VDA into fiat is an SP; the fiat itself, digital or not, is not a VDA.
A worked example
Illustrative figures.
Ms Priya Nair of Kochi holds three digital things of value on 1 September:
| Holding | Value | Inside the VDA guidance? |
|---|---|---|
| CBDC held in a digital wallet | Rs 25,000 | No — a digital representation of fiat currency |
| A crypto-token bought on an exchange | Rs 3,20,000 | Yes, as the asset — a VDA convertible to fiat |
| Rupees in her savings account | Rs 1,40,000 | No — fiat currency |
On 5 September she sells the token on the exchange for Rs 3,20,000 and withdraws the rupees.
Who is the SP? The exchange. It carried out exchange between a virtual digital asset and fiat currency for another person in the course of business, which is the first SP activity. It is therefore within the guidelines and — as the Bybit order in Chapter 8 shows — a reporting entity under section 2(1)(wa) of the PMLA, which must register with FIU-IND. Bybit Fintech Ltd expanded in India without that registration; FIU-IND had its websites blocked for persistent non-compliance and, by order dated 31 January 2025, imposed a total penalty of Rs 9,27,00,000.
Her CBDC. Paying a shopkeeper Rs 2,000 from the CBDC wallet is a payment in digital fiat. Nothing about it brings the VDA guidance into play.
Why NISM asks about it
Chapter 5 (AML, CFT and PF Guidelines), sections 5.2.3 and 5.2.4, carries the SP definition, the purpose and scope of the VDA guidelines, and the CBDC exclusion; Chapter 8, section 8.8, applies the regime to Bybit. Expect a scope question asking which of several digital assets falls outside the guidance, a recall question on the 10 March 2023 effective date, and the definition of fiat currency.
Common exam traps
- A CBDC is not a VDA for the purposes of this guidance. It is a digital representation of fiat currency.
- Fiat means government-issued currency not backed by a precious metal — the workbook's own definition.
- The exclusion is from this guidance. The workbook says CBDCs are outside the scope of the VDA guidelines; it does not say anything more about them.
- The guidance focuses on convertible VDAs — convertible to other VDAs, or to fiat, or intersecting with the fiat financial system.
- Effective 10 March 2023. The separate circular on registration of VDA SPs as reporting entities is dated 17 October 2023.
- Do not confuse deterrence, detection and record-keeping (the strategy) with the four purposes of the guidelines.
Check yourself
1.Which of the following is NOT a purpose of the CFT and PF Guidelines?
- a)To prevent entities from engaging in VDA activities
- b)To indicate best practices in the design and implementation of an effective risk-based approach
- c)To establish an efficient reporting mechanism to prevent money laundering
- d)To assist engaged entities to better understand their AML/CFT/CPF obligations
Show the answer
Answer: (a) To prevent entities from engaging in VDA activities
The four stated purposes are:
Understand and apply the risk-based approach and indicate best practices in the design and implementation of an effective risk-based approach
Identify the entities that conduct activities or operations relating to VDAs i.e., SPs
Establish an efficient reporting mechanism to prevent money laundering, terrorist financing and proliferation financing
To assist entities engaged in or seeking to engage in VDA activities or operations to better understand their AML/CFT/CPF obligations and how they can effectively comply with the AML/CFT/CPF requirements as notified under PMLA/PMLR
Nothing about preventing the activity itself.
Indeed the fourth purpose points the other way — it expressly contemplates entities seeking to engage in VDA activities or operations and sets out to help them.
The scope confirms the approach. The guidelines apply to SPs and explain how they should implement the AML/CFT/CPF obligations effectively, focusing on VDAs that are convertible to other funds or value, including both VDAs that are convertible to other VDAs and VDAs that are convertible to fiat or that intersect with the fiat financial system.
Convertibility is what creates the risk — value that can leave the regulated system.
Which explains the one exclusion: Central Bank issued Digital Currencies (CBDCs) are outside the scope of this guidance since they are digital representation of fiat currencies (government issued currency that is not backed by a precious metal).
The whole framework is risk-based, not prohibitory. The first purpose is to understand and apply the risk-based approach — the same approach the PML Rules take, requiring each entity to carry out risk assessment to identify, assess and take effective measures to mitigate its money laundering and terrorist financing risk for clients, countries or geographic areas, and products, services, transactions or delivery channels.
These guidelines became effective from 10th March 2023.
2.Why are Central Bank issued Digital Currencies outside the scope of the AML/CFT/PF guidance?
- a)Because they are digital representations of fiat currencies — government issued currency not backed by a precious metal
- b)Because they cannot be transferred electronically
- c)Because they are used only by banks
- d)Because they are not convertible into any other value
Show the answer
Answer: (a) Because they are digital representations of fiat currencies — government issued currency not backed by a precious metal
Central Bank issued Digital Currencies (CBDCs) are outside the scope of this guidance since they are digital representation of fiat currencies (government issued currency that is not backed by a precious metal).
The reason is that a CBDC is already money. The guidance targets a different risk.
What the guidance does cover: it focus[es] on VDAs that are convertible to other funds or value, including both VDAs that are convertible to other VDAs and VDAs that are convertible to fiat or that intersect with the fiat financial system.
Convertibility is the risk factor — an asset that can turn into money, or into another asset that can turn into money, can carry value outside the regulated system. A central bank currency is inside that system by definition.
Option D inverts the reasoning. CBDCs are perfectly exchangeable; being fiat is precisely why they are excluded.
The rest of the scope: the guidelines apply to SPs and explain how they should implement the AML/CFT/CPF obligations effectively.
And a Service Provider is a person carrying out, for another person and in the course of business, exchange between virtual digital assets and fiat currencies, exchange between one or more forms of virtual digital assets, transfer of virtual digital assets, safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets, or participation in and provision of financial services related to an issuer's offer and sale of a virtual digital asset.
Note how those five activities track the convertibility risk — the first two are conversion, the third is movement, the fourth is control, and the fifth is issuance.
These guidelines became effective from 10th March 2023, and they summarise the PMLA, the UAPA and the WMDA and rules there under.
Where this is taught
Free preparation for NISM Series XXIVRelated terms
- Reporting entityUnder Section 2(1)(wa) of the PMLA, a banking company, financial institution, intermediary or person carrying on a designated business or profession — the entity that must keep records and report to FIU-IND.
- Virtual Digital Asset Service ProviderA provider of services related to virtual digital assets — a reporting entity under section 2(1)(wa) of the PMLA, which must register with FIU-IND and meet its record-keeping and reporting duties.
- LayeringThe second stage of money laundering — moving money through enough transactions, accounts and jurisdictions that the trail back to the original crime becomes impossible to follow.
- Risk Based ApproachApplying each due diligence measure in proportion to the money-laundering risk a client poses — enhanced diligence for higher-risk clients, simplified for lower-risk, never simplified where suspicion exists.
- FIU-INDIndia's central national agency for receiving, processing, analysing and disseminating information on suspect financial transactions, set up in November 2004 and reporting to the Economic Intelligence Council.