UPI or CBDC: Which is better?

The pilot study of the CBDC has raised curiosity about the new digital currency. While the responses of participants are expectedly tepid and restrained, the question uppermost on everyone’s mind is – how is this better than UPI/Bhim/Paytm?

The retail pilot of CBDC is planned on a limited scale, and currently only on invite basis. A few more banks other than the eight chosen will be added soon along with more tier 2 cities.

According to a media report which obtained information using the Right to Information, the total number of “e-rupees” issued by January 20 was Rs 2.43 crores for retail, and Rs 115.92 crores for wholesale. That’s about Rs 118 crore of new money freshly added. The pilot has enrolled 50,000 and over 5,000 merchants. The number of transactions recently was around 770,000.

Some of the reactions from the public related to comparing the CBDC with the popular UPI/mobile based payments.

Here are some of the questions and Blockmagic has tried to answer them to the best of its knowledge:

Are there any incentives for using CBDC instead of UPI?

So far, there is no “cash back” scheme, but it won’t be surprising if these schemes are floated to popularize the digital rupee. Among non-monetary incentives are things like:

  • No bank involvement for small payments could be a feature. Payments occur directly via the internet from one mobile app or wallet to another.
  • No threat of cryptocurrencies like bitcoin, ether, etc.
  • Makes India a digital economy like other countries who will soon adopt digital currencies. UPI or mobile payments are currently popular around the world. But as other countries start adopting their digital currencies, India will need to stay ready.
  • Cross-border trade settlements are a major use case for digital currencies, and India will need to have a platform to tie-up with other countries who may gradually switch to digital currencies if they turn out to be a better option.

How is CBDC different from UPI?

It’s no different as far as the user experience is concerned. A different symbol or wallet make users think of why it’s needed when the same can be done over mobile wallets.

The underlying technology is however very different – the transactions go from one mobile wallet to another via the internet connection. Small payment will not be recorded if the feature is implemented, and only large payments will be recorded by the participant bank who issues the wallet. There may or may not be a KYC to use the wallet. The RBI will maintain a central ledger for the entire ecosystem.

What is the purpose of CBDC?

Ostensibly to make India a digital economy. A lot of the motivation emerged from the threat posed by cryptocurrencies or private money.

Is it on the way to achieve its objective?

The pilot is only a test, and only invited guests can use it.

Is it being introduced for more control over consumers and reduce their freedom?

Small transactions, like paying cash or coins in the market, may not be tracked. Large transactions are expected to be recorded, just like online payments by internet.

Will it cause more inflation by adding more “Rupees” into the system?

Whether “more rupees” will be added can’t be ascertained. The RBI will control the issue of digital rupees just as it does cash. One of the major reliefs is that, had crypto been allowed, it would have created a “parallel monetary system” with no central control over total “money” in circulation.

Also read:

RBI’s CBDC Retail Update: 16,000 testers so far


India’s pilot CBDC: What considerations went into the making





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