The Reserve Bank of India (RBI) has recently scaled the pilot of Central Bank Digital Currency (CBDC) or e-rupee for the retail sector. The central bank has received “very satisfactory” feedback and after the pilot, the digital currency might be made public, enabling payments digitally. However, Unified Payments Interface (UPI) is already being used in a tremendous volume for digital transactions. So, how does this new product different from UPI?

Key difference between e-rupee and UPI:

UPI is a digital payment system. One can pay money digitally through different methods. For instance, using debit/credit cards on a merchant website, through internet banking, by mobile wallets, etc.

E-rupee is, in fact, a currency in digital form, whereas UPI is a platform that facilitates banking transactions. The CBDC will not have an intermediator.

Deputy governor T Rabi Sankar explained during the latest Post Monetary Policy Press Conference, “Any UPI transaction involves the intermediation of the bank. So, when I use a UPI app, my bank account gets debited and money gets transferred to the recipient’s bank. In paper currency, you can draw 1,000 from the bank, keep it in your wallet and spend it at a shop.”

“Similarly, in CBDC, you will draw the digital currency and keep it in your wallet on your mobile. When you make a payment at a shop or to another individual, it will move from your wallet to their wallet. There is no routing or intermediation of the bank,” he added.

E-rupee is a legal tender money

As the name suggests, the CBDC is a legal tender money backed by the RBI similar to cash, but for UPI payments, it has to be linked with bank accounts.

Rohit Arora, Chief Executive Officer (CEO) and Co-founder of Biz2Credit and Biz2X explains,“ UPI transactions are backed by physical cash that links back to your bank account, CBDC is a legal tender in itself and does not need to be backed by physical currency.”

He further adds that, unlike conventional digital payments and transactions where banks have their own individual handler, digital rupee or CBDC is operated by the RBI, thus transactions are instant and direct.

Does legal tender mean no one can deny accepting it?

A person can not refuse accepting legal tender currencies. However, given that many parts of India still have the poor digital infrastructure, the RBI may exempt the e-rupee from being binding for acceptance.

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Anonymity between transactions

One of the intrinsic properties of physical cash is its anonymity. Transactions through physical cash enable privacy as only the parties involved have the information. However, in UPI payments banks being intermediators have the data.

The CBDC too carries this feature. Arora says, “I can withdraw CBDC or digital currency, and keep it in my wallet, which in this case is my mobile phone. When I make a payment, the money will move from my wallet to the recipient’s wallet. Therefore, banks will not get involved in the process. In other terms, in the case of CBDC, money moves between two private entities, individuals or businesses, similar to physical cash.”

Different use cases of CBDC

Over time, with the evolution of the system, e-rupee can have many novel applications.

1) It can serve as ‘fit-for-purpose’ money or programmable payments that can be used for social benefits and other targeted payments. Biz2Credit’s CEO says, “Central bank can issue CBDC for LPG subsidies as direct benefit transfer (DBT). Such CBDC can only be accepted at authorised LPG agencies and cannot be used elsewhere. LPG agencies can convert this CBDC to a general-purpose CBDC or fiat currency at any bank, which would have the necessary authorisation to change the nature of the CBDC.”

He adds that such a system of subsidies can also be implemented in the agricultural sector, where subsidies for fertilisers could be transferred through CBDC. Only authorised fertiliser outlets can accept this CBDC. This process can be replicated in the payment of employee expenses like telephone bills, and other reimbursements, or in supply chain ecosystems, for paying state border taxes, etc.

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2) Digital currencies can be utilised for faster cross-border remittance payments. “Countries will need to collaborate and put the proper infrastructure in place for CBDC transfer and conversion. If the process is interoperable, it could lead to real-time money transfers,” Arora says.

4) As CBDCs facilitate instant settlement, there is low risk involved in retail payments as well. CBDCs’ digital nature plus ownership record transfers provide indisputable evidence of proof of ownership.

5) Instant lending to MSMEs will also be possible through the CBDC route. Banks will be better equipped to draw up accurate borrower risk profiles and issue loans to MSMEs quickly. Even financial stimulus for MSMEs can also be disbursed quickly from the central bank.

Arora states, because of the fact that CBDC is trackable, the process is transparent and cannot be forged. By adopting CBDC, MSMEs can easily meet their financial requirements and scale their businesses sustainably.

6) Arora, being a FinTech pioneer himself, believes that CBDC can also be used for offline payments, which will be based on near-field communication (NFC) technology on a feature phone or a smartphone.

“In remote areas where there is no mobile network, this is a highly safe and secure solution for payments. The verification of a person’s identity, confirmation of a transaction and payment will occur over the offline wallet, without the need for the internet,” he adds.

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