As per IMF1, India is one of the few countries across the globe which has an advanced digital payment infrastructure. India’s digital payment volume has increased at an average of 50% year on year, over the past 5 years. In the last financial year alone, the value of digital transactions amounted to 5.86 billion Rupees, and this has been possible because of the Unified Payment Interface (UPI) which was introduced in 2016. Using UPI, an individual can transfer money 24X7X365 from one mobile to another in a secure way.
A question arises, when India already has a robust digital payment infrastructure, what is the need for e-Rupee Central Bank Digital Currency(CBDC)?
Difference Between e-Rupee and UPI Technology
Let’s analyze the difference between e-Rupee CBDC and UPI technology to understand if e-Rupee is actually required in India or not
1) Platform
UPI is a platform that enables digital transactions between 2 individuals and between individuals and merchants, using a QR code whereas e-Rupee CBDC is actually a digital currency. It is exchangeable, one-to-one, with the Indian Rupee currency notes.
2) Role of Bank as Intermediary
In the UPI framework, the bank plays an important role in executing a transaction. On initiating a transaction through UPI, the bank receives a message to debit the payor’s account and credit the payee’s account by leveraging IMPS infrastructure. UPI transaction can’t be completed, without the involvement of the bank as an intermediary,
On the contrary, the e-Rupee CBDC is a token. An individual can virtually transfer the amount saved in his/her savings bank account to a KYC-enabled e-Rupee CBDC digital mobile wallet. Once the transfer is complete from the bank account to the digital mobile wallet, the individual shall hold the e-Rupee CBDC retail token in his/her wallet, which can be used to make payments by transferring the token from his/her digital wallet to another individual or merchant’s digital wallet.
3) Handling of Money
In the UPI platform, the transfer of money takes place using IMPS however e-Rupee CBDC is similar to cash lying in your digital mobile wallet which can be used to make payment to an individual or a vendor.
4) Technology
UPI platform is a technology owned and maintained by the National Payment Corporation of India. It is an API-enabled messaging platform that helps in communicating with the intermediary bank to complete the transaction whereas e-Rupee CBDC is built on a centralized blockchain ledger where each transaction is recorded on a blockchain ledger.
5) Liability of Money
In the current financial system under UPI, the money lying in the bank account is a liability of the bank and in case, the bank fails, the money saved in the bank account is lost. In such a case, initiating a UPI transaction shall be declined due to the deficiency of funds in the bank account.
However, the e-Rupee is the liability of the Reserve Bank of India and is backed by its asset. The risk of the bank failing shall not affect the e-Rupee present in the digital wallet of an individual.
6) Grants and Subsidies
Even though UPI is an instant payment network, transferring grants or government subsidies is currently being handled in a complex way. A digital token is sent as a message to the beneficiary’s account which is then shared with the designated merchant to avail the subsidy.
However, with the e-Rupee, the government can directly transfer the subsidy to the individual’s mobile digital wallet and can be programmed to be used only at designated merchants. The individual shall not need to share the digital token code with the merchant to redeem it.
Further, if the government plans for a Universal Basic Income, transferring the monthly amount to the digital wallets of the individuals in e-Rupee, shall be quite easy.
7. Direct Taxation
Currently, with UPI, it is not possible to deduct tax at the source of payment however with e-Rupee CBDC, possibilities of deducting the tax at the source of payment are being explored. The government shall have a list of all the vendors and the type of business they do. For each business type, the government has a pre-defined VAT rate. On making the payment to the merchant, the government shall program the e-Rupee to credit the tax in the government’s account, on a real-time basis.
8. Offline Payment
UPI doesn’t have the capability to make offline payments to individuals or to merchants in the absence of a network however e-Rupee CBDC has the capability to transact offline in case there is a network outage.
Flip the Chain Thought:- How e-Rupee CBDC works offline?
9. Cross-Border Payments
UPI platform is built to transact domestic payments only however with the wholesale version of the e-Rupee, one can even execute cross-border payments.
Flip the Chain Thought:- How e-Rupee CBDC plays a role in Cross Border Payments?
Take Away
UPI is a time-tested Indian technology however e-Rupee is a Central Bank Digital Currency that is in the pilot phase at the moment. Having said that multiple countries across the world are working on the CBDC project and are either in a research phase or development phase or pilot/testing phase or have already launched it2. These countries are working in coordination with the IMF and the Bank of International Settlements so as to build CBDCs with standards that shall help in making them interoperable while doing cross-border transactions. Since CBDC technology is an advanced version of UPI technology, therefore there is a need for India to have an alternate technology for payments to be at par with the world and maintain its supremacy in digital cashless payments.
References
1) Mathew, J. K. and A. (2022, October 27). How India’s Central Bank helped spur a Digital Payments Boom. IMF. Retrieved February 7, 2023, from https://www.imf.org/en/News/Articles/2022/10/26/cf-how-indias-central-bank-helped-spur-a-digital-payments-boom
2) CBDC pilot: A tale of intense prep, high hopes, and a nagging existential question. Moneycontrol. (n.d.). Retrieved February 7, 2023, from https://www.moneycontrol.com/news/business/cryptocurrency/cbdc-pilot-a-tale-of-intense-prep-high-hopes-and-a-nagging-existential-question-9652461.html
