CBDC Digital Rupee vs UPI — Explained

UPI and CBDC (Digital Rupee) are two distinct payment systems that have experienced significant surges in popularity in recent times. Each of the two payments has advantages and disadvantages.

Discover the key differences in terms of use cases, status, acceptance controversies

This document covers

UPI — Explained
CBDC Digital Rupee — Explained
UPI Vs CBDC Digital Rupee — a comparison
Which one you should prefer?

1. UPI — Explained

UPI means "Unified Payments Interface". It is a real time payment system which is developed by NPCI (National Payments Corporation of India).
UPI facilitates inter bank peer to peer (P2P) transactions and Person to Merchant transactions (P2M)
UPI is used on mobile devices. The mobile number of the device is required to be registered with the bank and the UPI Id of the recipient can be used to transfer the money.
Internet or Mobile Network is mandatory for making UPI Payments.
UPI enabled App is a must to make UPI payments with the bank link.
UPI's are controlled by consortium of banks
UPI payments involve the transmission of funds from the bank account of the sender to the bank account of the recipient. In response to NPCI's request, the sender's bank must discharge the funds and transmit a debit response to NPCI once the debit is completed successfully.

The receiving bank will credit the requested amount to NPCI and provide NPCI with a credit response once the credit has been completed successfully. The actual settlement occurs during the non-immediate bank settlement cycle.
As of now UPI is the most successful mode of payment with high number of users and volume of transactions

2. CBDC — Explained

CBDC means "central bank digital currency" which is issued by central bank. CBDC is a digital version of country’s national currency.
Most of the countries are creating their own CBDC For Example, RBI has launched the digital rupee which is controlled by Rupee
CBDC serves as alternative to cash and physical currency which is much easier to use. CBDC can be issued in the forms of tokens or accounts based format
CBDC facilitates the transfer of money from one digital wallet to another
By using CBDC, the sender will exchange the coins with the recipient and the transfer happens instantly.
Internet or Mobile Network is not be required to use
Advantages:
- Currently, numerous small and medium-sized enterprises (SMEs) are employing UPI in conjunction with a personal UPI license or KYC. This implies that the money is being transferred to the personal account rather than the business account when paying for the business, thereby evading taxes. This is effortlessly traceable with CBDC, a clear advantage to both the government and individuals, as tax revenue is returned to society.
- At the same time, businesses also benefit from not paying exorbitant MDR fees, as nearly 2-4% of revenue is allocated to payment gateways. Business losses result from this. CBDC will not be associated with such a loss. Hence CBDC is an advantage to both merchants and individuals.
- CBDC also mitigates settlement risk, minimizes the cost of currency management, and reduces dependence on physical cash. The implementation of CBDC has the potential to result in a more reliable, efficient, trusted, regulated, and legal tender-based payment option, including cross-border payments.
- Additionally, it would increase the accessibility of financial and credit markets by reducing the reliance on traditional banking and financial institutions.
Disadvantages:
CBDC is also having certain risks such as public policy issues like risk to financial stability, privacy, monetary policy, availability of money when in disasters where there is no power or internet.
Types of CBDC: CBDC are of 2 types
- Retail CBDC-R: It is accessible to enterprises, non-financial consumers, and the private sector..
- Wholesale CBDC-W: Available exclusively to financial institutions for the purpose of transferring funds between them. It will be implemented to optimize securities settlement or interbank payments.
Forms of CBDC: CBDT can be accessed as token or account based or combination of both
Token based CBDC: It is a bearer-instrument like banknotes. In this case, the person receiving a token will verify that his ownership of the token is genuine. It would be a preferred mode for CBDC-R as it is closer to physical cash.
Account based CBDC: It requires maintenance of record of balances and transactions of all holders of the CBDC and indicates the ownership of the monetary balances. In this case an intermediary verifies the identity of an account holder. It would be a preferred mode for CBDC-W

In India, RBI is still exploring the Digital currency option and it might take some considerable amount of time to launch digital rupee in India

3. UPI vs CBDC Digital Currency — a comparison

Subject	UPI	CBDC Digital Currency
Definition	Unified Payments Interface	Central Bank Digital Currency, a form of Digital Currency, aka eRupee (e₹)
Controlled By	NPCI (National Payments Corporation of India)	RBI (Reserve Bank of India)
Facilitates	Inter bank peer-to-peer (P2P) transactions and Person-to-Merchant transactions (P2M)	CBDC from one digital wallet to another or A rupee amount from a bank account into a digital wallet in the form of CBDC tokens
Devices to have	Mobile Devices	Mobile Devices
Denominations	No denomination as such; in increments of Rs. 1	e₹2, e₹5, e₹10, e₹20, e₹50, e₹100, e₹200, e₹500, e₹2,000^
Use Cases	Money transfer between Wallets, Purchases, Gifts	Money transfer between Wallets, Purchases, Gifts, FDs, Investments, commercial paper*
Internet / Network	Need Internet	Internet not needed at the time of Wallet Transfer. In war times, when no power for longer duration, access to CBDC would be difficult.
Transaction Processing Times	Real-Time Payments	Close to Real-Time Payments
Security	Composite Transaction across Banks, UPI Networks, Mobile Networks	Blockchain ledger is maintained
International Usage	Used in US, and few other countries for NRIs on a pilot basis.	Scope for international use but may take time to implement.
Form of Currency	No Physical Form, All Digital	No Physical Form, All Digital. Unlike UPI, Currency is represented in tokens and is very similar to physical currency, except in digital form.
Current Status	Operational and Very Successful	Ongoing Pilot mode across 13 banks in India
Acceptance	Well Accepted; Anyone with a smart phone and a bank account can start using.	In Pilot mode; expected to accept where UPI is being accepted. Available in both Retail CBDC and Wholesale CBDC
Why to use?	UPI is only interface that is quick, easy, secure and scalable at this time.	CBDC can also work in remote places where there is no internet, though you need the network from time to time. no Intermediaries to deal with. No MDR fees for merchants etc.
Cost to Use	UPI when used for business, the payment gateways charge 2.5% of the transaction amount, which is very high compared to Physical Rupee Note.	CBDC Digital Rupee is controlled by RBI and is expected to have no to low transaction cost for businesses. Remember, there is no intermediary required for CBDC.
Controversies	UPI is well accepted but the MDR fees of 2.5% from the payment gateways make the public loose 2.5% for every transaction. Absolutely un-acceptable, hope the Govt of India will remove MDR fees in future.	CBDC unlike UPI is a stored tokens that can be used without any MDR fees while transacting. There are rumors that CBDC in it's final form comes with a currency expiration.

* Expected in near future (as on Jan 2024). ^ Usage is yet to be confirmed.

4. CBDC vs UPI: Which one you should prefer?

Each of the two payment methods has its own benefits and drawbacks. When deciding between CBDC and UPI, security, speed, acceptance, maintenance fees, and other considerations come into play.

CBDC provides a higher level of security in comparison to UPI due to its central bank operation. The merchants' adoption of CBDC may require a slightly longer duration when compared to UPI.

In the end, it is the individual's choice, contingent on the situation at the moment of payment.