Digital Rupee- How is e-Rupee Different from UPI?

The Reserve Bank of India (RBI) recently expanded the pilot programme for Central Bank Digital Currency (CBDC), also known as e-rupee, for the retail sector. The central bank has received "very satisfactory" feedback, and the digital currency may be made public after the pilot, allowing for digital payments. However, the Unified Payments Interface (UPI) is already widely used for digital transactions. Here is how e-Rupee is different from UPI?

Difference between e-rupee and UPI

UPI stands for Unified Payments Interface. Different methods of digital payment are available. For example, using debit/credit cards on a merchant website, internet banking, mobile wallets, and so on.

E-rupee is a digital currency, whereas UPI is a platform that facilitates banking transactions. There will be no intermediary for the CBDC.

Any UPI transaction involves the bank's intermediation. So, when I use a UPI app, my bank account is debited and money is transferred to the recipient's bank, whereas with CBDC, you draw the digital currency and keep it in your mobile wallet. When you make a payment at a store or to another person, the money moves from your wallet to their wallet. The bank provides no routing or intermediation.

CBDC is legal tender money backed by the RBI, similar to cash, but it must be linked to bank accounts for UPI payments. UPI transactions are backed by physical cash that is linked to your bank account, whereas CBDC is legal tender in and of itself and does not require physical currency to be backed. One cannot refuse to accept legal tender currencies. However, because many parts of India still lack adequate digital infrastructure, the RBI may exempt the e-rupee from being legally binding for acceptance.

The anonymity of physical cash is one of its inherent properties. Transactions involving physical cash allow for privacy because only the parties involved have access to the information. However, in UPI payments, banks serve as intermediaries and have access to the data. CBDC or digital currency can be withdrawn and kept in a mobile wallet and When payments are made, funds are transferred from one's wallet to the recipient's wallet. As a result, banks will not participate in the process. In other words, in the case of CBDC, money is transferred between two private entities, such as individuals or businesses, in a manner similar to physical cash.

Use of Central Banks Digital Currency

Central banks can issue CBDC for LPG subsidies as direct benefit transfer. CBDC of this type can only be used at authorised LPG stations and cannot be used elsewhere. LPG companies can convert this CBDC to a general-purpose CBDC or fiat currency at any bank that has the necessary authorization to change the CBDC's nature.

A subsidy system could be implemented in the agricultural sector, where subsidies for fertiliser could be transferred through CBDC.This CBDC can only be accepted by authorised fertiliser retailers. This process can be replicated in the payment of employee expenses such as phone bills and other reimbursements, as well as in supply chain ecosystems for paying state border taxes, and so on.

Digital currencies can be used to make cross-border payments more quickly. "Countries will need to collaborate and put the proper infrastructure in place for CBDC transfer and conversion. If the process is interoperable, it may lead to real-time money transfers, according to Arora.

Because CBDCs enable instant settlement, retail payments are also low risk. The digital nature of CBDCs, combined with ownership record transfers, provides irrefutable proof of ownership.

Through the CBDC route, instant lending to MSMEs will also be possible. Banks will be better equipped to create accurate borrower risk profiles and quickly issue loans to MSMEs. The central bank can also provide financial assistance to SMEs quickly.