Digital rupee will co-exist rather than compete with UPI: Experts

The recently-announced Central Bank Digital Currency (CBDC) is likely to co-exist with the Unified Payments Interface (UPI) rather than compete with it, say experts.

"The physical bank with saving accounts will never be completely replaced by digital currency accounts. Digital currency accounts will be in the form of digital wallets, which may inhibit adoption among older people. The CBDC will co-exist rather than compete with UPI," said Pooja Sondhi, Director & COO, Livfin.

Currently, the digital rupee is not as convenient as UPI because it has been opened only to select users in a closed-user group (CUG).

UPI is a bank-to-bank transfer, so banks know who you are paying and how much, whereas the digital rupee is like cash and therefore won't leave an audit trail.

Experts believe that in order to ensure that the CBDC is widely adopted the Reserve Bank of India (RBI) will have to develop an ecosystem like UPI.

Across the country, people have rapidly adopted UPI and QR code-based payment systems that have helped them transact, especially during the nationwide lockdown due to Covid.

"An ecosystem needs to be built for the retail adoption of the e-Rupee. For example, there are many cashback offers on UPI apps, which are a great pull for the user. It's too early to anticipate mainstream adoption of e-₹ at the moment. To boost consumer confidence, the dispute resolution and refund procedure also needs to be strengthened," said Aditya Damani, Founder, and CEO, of Credit Fair.

Experts also say that the RBI needs to clarify a lot of things about CBDC such as the extent of its usage.

Also read: RBI Digital Rupee launch: Know all about the retail central bank digital currency

Is CBDC safe?

The RBI has said that the e-₹ is safe as it carries a sovereign guarantee, like cash.

Sondhi further added that tokenisation, strong authentication, biometrics, etc., can mitigate the risk of data interception and fraud. ``Digital payments are safe and are moving towards greater security," Sondhi added.

"Digital currency is focused on enabling the common man with a simple, secure, and robust payment system. In addition, the unbanked are also brought within the banking system," said Sanjoy Datta, Partner and Financial Services Industry Leader, at Deloitte India.

"RBI’s pilot project on retail-CBDC is a game changer with durable effects that should ensure better monetary transmission at much lesser costs. The anonymity factor is critical for its acceptance. It collaborates, complements, and completes the currency architecture in vogue, while also incubating further innovation," said Dinesh Khara, State Bank of India, Chairman.

Also read: RBI Digital Rupee Pilot: How Retail CBDC is different from UPI | Explained

What is CBDC?

The RBI defines CBDC as a legal tender issued by the central bank in digital form. It is similar to sovereign paper currency and is exchangeable at par with existing currency.

Just like paper currency, CBDC is issued directly by the RBI, not by banks, and will appear as a liability on its balance sheet.

The RBI started a pilot for the retail digital Rupee (e-₹ R) on December 1. The central bank has identified eight banks for the project which will take place in two phases.

The first phase will begin with four banks — the State Bank of India (SBI), ICICI Bank, Yes Bank, and IDFC First Bank —across four cities: Mumbai, Delhi, Bengaluru, and Bhubaneswar.

The second phase will see four more banks joining the project. The Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank will extend the pilot to nine more cities: Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.