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CBDC vs UPI vs Cash


Hello Reader,

Today we’ll be talking about the new digital currency CBDC a.k.a e₹, and how it will differ from the other modes of currency, its features, benefits and much more.

Let’s get started!


What is Central Bank Digital Currency, after all?

As per RBI’s concept note on Central Bank Digital Currency (CBDC or e₹), CBDC is defined as a legal tender/currency issued by the central bank in a digital form. It is of similar nature to sovereign paper currency, exchangeable at par with existing currency, and shall be accepted as a medium of payment, legal tender and a safe store of value.

RBI is planning to launch two forms of CBDC:

  • CBDC-R (e₹-R) which will be available for use by all, including the private sector, non-financial consumers and businesses
  • CBDC-W (e₹-W) will be available for use by selected financial institutions intended for interbank transfers and related wholesale transactions

RBI launched the pilot for the wholesale segment, known as the Digital Rupee -Wholesale (e₹-W), on November 1, 2022. As of Dec ’22, wholesale CBDC recorded Rs. 325 Cr avg daily transactions.

The pilot in the retail segment, known as digital Rupee-Retail (e₹-R), was launched on December 01, 2022, within a closed user group (CUG) comprising participating customers and merchants.

Recently, CBDC has gone mainstream. The Reliance Retail Group company has already rolled out this feature at its gourmet store Freshpik and will expand the service across all its properties eventually. Reliance Retail has partnered with ICICI Bank, Kotak Mahindra Bank and Innoviti Technologies to roll out the service.

How does CBDC work?

Imagine you can have a new form of cash, instead of a rupee note, issued by the same RBI that you can store, transact and transfer through a digital wallet. You would think this is something you can do with your bank account too. But, here, you actually don’t need a bank for transactions. CBDCs make you deal directly, just like cash and transferring it to someone else’s wallet, equivalent to physical cash and purse.

Users can load their digital wallets by connecting to their bank accounts or from RBI only once; this money in the wallet is as good as ‘physical cash’.

Why CBDC or e₹?

  • CBDCs also have an offline feature which means you don’t need the internet to receive this new type of ‘cash’. This improves cash availability in remote areas and works even during power/network outages, further increasing Bharat’s digitization and financial inclusion.
  • For the government, it will reduce operational costs involved in physical cash management. CBDC will take a one-time infrastructure setup and maintenance cost, but it will remove the operational cost of printing cash, delivery of cash, security involved in delivery, storage facility cost, etc
  • The government can transfer the subsidy via CBDCs to the beneficiary, who can use it for that specific purpose only. So a CBDC transferred for buying ration cannot be used for paying rent. This is even better than direct cash transfers to bank accounts where you are not sure how the cash is being utilized.
  • Being in direct control of RBI, CBDC can be used to boost a specific part of the economy, like allocating a budget in the form of CBDC for only the tech or MSME sector.
  • Countries can save on international trade. For every dollar traded in the international market, US banks earn some commission. With CBDC interoperability, countries can save this commission.

How is it different from Unified Payment Interface (UPI)?

In UPI, there is intervention from banks during transactions. Once a user/payee chooses to pay an amount, the amount gets debited from the sender’s bank account and credited to the recipient’s bank account. On the other hand, in CBDC, User/payee draws the digital currency in the wallet (mobile phone) and pays directly from his wallet to anyone else’s wallet. Hence the transfer doesn’t require intermediation of the bank. So in UPI, bank accounts are required, whereas, in CBDC, bank accounts are not required.

Note: CBDC requires way less infrastructure than UPI for fund flow. Every UPI transaction takes a toll on banking infrastructure as well as results in the sender bank incurring a fee. RBI has tried to develop a simple infrastructure for CBDC where it uses blockchain power to utilize every phone as a node to process payments while maintaining 3 party ledger of blockchain tech, aka a legalized crypto.

P2P Transaction Fund Flow: UPI vs CBDC

Wait and watch for…

There still is time for CBDC to launch for public use. Before making CBDC available to the public, RBI has to look out for:

  • Security and anonymity, like cash, have to be the prime priority of RBI while designing the CBDC. RBI has an uphill task to prevent Anti-money laundering and terrorism financing through CBDC.
  • On average, 28.4 crore digital transactions are performed in a day in India. Maintaining zero downtime, zero fraud, and data integrity is a challenge.
  • How RBI and government will popularise the CBDC in a country where UPI dominates payments.

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  • January 23, 2024
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