CBDC vs UPI: Risks and Rewards

On December 1, 2022, the government launched its pilot program for the retail Central Bank
Digital Currency (CBDC) in four cities—Mumbai, New Delhi, Bengaluru, and Bhubaneswar.
For the initial phase of the pilot project, the RBI has chosen four banks: SBI Bank, ICICI Bank,
YES Bank, and IDFC First Bank. CBDCs represent a liability for the central bank. They come in
two varieties: retail (the virtual currency for consumers and companies) and wholesale (accessed
only by financial institutions, like existing central bank settlement accounts).
In practically every store today—not just in urban areas but also in Tier 2 and Tier 3 cities and
beyond—one may find a QR code scanner. UPI allows immediate payment, whether in a Kirana
store or a Big Bazaar. How would the digital rupee perform in the UPI era, then? There are
currently around 26 crores unique UPI users in India. Around 730 crore UPI transactions of INR
12.11 lakh crore were made in October.
CBDC fundamentally differs from the UPI technology developed by the National Payments
Corporation of India (NCPI). The bank acts as an intermediary in UPI transactions. Similar to
how people who use paper money visit the bank, withdraw money and keep it in their purse,
those using digital currency can do the same with CBDC and use it to make purchases. Without
the bank's involvement, it will transfer from one person's wallet to another. The digital rupee will
be the fundamental payment channel for digital payments rather than currency/cash. Payment
rails such as UPI, IMPS, and others use the underlying currency or cash to send funds. A smooth
payment transaction is expected when payment rails and the digital rupee function together. UPI
payments are now made using digital representations of actual cash notes. In other words, each
rupee moved via UPI is backed by actual cash. Since it will be recognized as a legal tender, the
virtual rupee won't need to be backed by actual money. Additionally, the Reserve Bank of India
(RBI) would run the digital currency, enabling direct and fast settlement of all transactions,
whereas each bank has a separate handler for conventional internet transactions.
 Another benefit of CBDC is its anonymity. Since banks are engaged in a UPI transaction, it
leaves a data trail, but because money is transferred from one wallet to another in a CBDC
transaction, no digital trail is left. As a result, nobody else can follow the digital traces of your
transactions. Could UPI's dominance of the Indian payments market prove to be a barrier for
retail CBDC? It makes sense for a citizen to use eRupee for payments if they are concerned
about anonymity and security, but in most circumstances, they want convenience, and UPI
provides that. Payment solutions like Google Pay and PhonePe invested heavily in marketing and
educating customers and sellers.
Additionally, they gave onboard customers millions of dollars in cash back. They still provide
other rewards, including coupons, more than five years later. According to experts, the RBI must
create a comparable ecosystem for retail CBDC to succeed.
Sources: Economic Times, Business Standard