UPI vs CBDC: Which Will Rule Your Phone?

In December 2022, the Reserve Bank of India launched a pilot project on the Central Bank Digital rupee.Also called the CBDC.
It’s like a digital version of the money the RBI prints: the rupee.
When Indians use the rupee in transactions, India’s Central Bank controls and makes sure everything is okay.
With India’s CBDC, they’re making a digital version of that regular money issued and backed by the Central Bank.
It’s like a new way to use money but still run by the government.
And India’s CBDC is being called all sorts of objectives like affordable, convenient, safe, accessible and secure.
At the same time, it could make one wonder: how is this different from UPI: Unified Payments Interface?
UPI is a real-time payment system facilitating transactions between banks.
Funds can be instantly transferred between two bank accounts using a mobile platform.
With UPI, a person is instructing their bank to transfer money from their bank account to the bank account of the other person.
This was developed by the National Payments Corporation of India, with the interface being regulated by the RBI.
According to the data from the NPCI, in September 2023, there were about 10.5 billion UPI transactions.
So, what is India’s CBDC in the face of a staple in India’s payment landscape like the UPI?
The big distinction between India’s CBDC and UPI is the presence of intermediaries.
When you use GPay or Paytm or another platform on your phone for a UPI transaction, your bank acts as an intermediary.
From your bank account, money gets debited and funds are transferred to the recipient’s bank.
On the other hand, India’s CBDC transactions don’t involve intermediaries.
If you hold India’s CBDC in your mobile wallet, the payment is a direct transfer from your wallet to a recipient’s wallet.
However, it may be that uploading the token amount or different denominations of the digital rupee requires linking a bank account or a UPI account.
And the money may be debited from your bank account to be loaded into your wallet as digital rupees.
So, there may be some degree of intermediary in both cases.
But, sometimes with UPI, transactions don’t work, because a bank server is offline or available.
So, India’s CBDC may be helpful there, mitigating those risks.
UPI primarily focuses on facilitating payments.
On the other hand, India’s CBDC could go beyond serving as a payment mechanism.
For example, when you rent a house, there’s a lot of paperwork and steps involved, like setting up payment methods and contracts.
It’s said that CBDC could simplify all of that and turn it into a digital process.
CBDC’s underlying tech is blockchain.
And there could be a higher degree of anonymity with India’s CBDC, compared to traditional digital transactions.
With CBDC, it’s said that there’s a one-time debit entry for currency purchases.
After that, all your other transactions happen directly from your digital wallet to the other person’s wallet.
Like, if you took out cash from your wallet and gave it to someone, it wouldn’t automatically be recorded or tracked.
When you use something like UPI, all transactions are recorded and it shows who the money went to.
In this case, UPI might be more helpful for people who want to track where their money goes.
On the other hand, people who may not want to involve banks during transactions and have a data trail may prefer India’s CBDC.
So, India’s CBDC is India’s currency in digital form, while UPI is a platform facilitating banking transactions.
Every Indian banknote reads “I promise to pay the bearer the sum of”
Each banknote would be a liability of the RBI.
When there are UPI issues, payment service providers may be liable.
Some say that CBDC isn’t expected to replace UPI, but is touted to replace physical cash.
But, UPI may be replacing physical cash, so it could be a competition between India’s CBDC and India’s UPI.