When it comes to the Central Bank Digital Currency (CBDC) in India, one question that often gets asked is why India needs a CBDC when it already has UPI and of course, cash.
Most people believe that UPI already solves the problems that typically come with cash. And to a large extent, that is true. While cash has been the primary medium of exchange for ages, it does carry a big amount of security risk. Cash is tangible in nature and widely accepted, but carrying cash is risky and susceptible to theft. Another reason why cash works is because it is accepted everywhere; there is literally no person or business that will refuse cash. But cash transactions can be time-consuming and inefficient. Cash also offers a high degree of privacy, but it can also be counterfeited and used for unlawful activities.
When UPI came onto the scene, it was touted to be the next big thing in payments, and it has lived up to that billing. UPI’s popularity and usage sees new highs every month, which is largely because of its speed, ease-of-use and interoperability. UPI transactions are instantaneous, it doesn’t require anything more than your smartphone and mobile internet, and it works across banks and apps. UPI also comes with a bunch of additional features. But the but here is that UPI is dependent on the internet and smartphone penetration in India is still low. UPI also puts the user at the risk of cyberattacks, frauds and scams, which we all know are becoming highly sophisticated.
So, as we’ve seen, both cash and UPI have their positives but also come with their own set of negatives. Can CBDC come in here and become the one answer to all of these problems?
The case for CBDC in India
India’s CBDC – the e-Rupee or e₹ - is said to be a game-changer for the financial and payments ecosystem in many ways. One of the biggest benefits of the e₹ is its ability to improve financial inclusion by catering to the unbanked population in rural parts of the country. The transaction costs of CBDC are said to be lower as compared to UPI, which would help low-income people to access financial services more easily.
CBDC also brings in better transparency and efficiency. When it comes to UPI transactions, many people don’t realise that the settlements are not instant, especially for person-to-merchant (P2M) transactions. Merchants usually receive settlements in batches throughout the day. e₹ transactions, on the other hand, are almost instant and therefore, lower the settlement timeframes in a big way. CBDC, like UPI, also allows transactions to be tracked and audited, which helps improve transparency and reduce fraud.
When it comes to hackers, one advantage that CBDC holds over UPI is that the financial loss can be less. When a UPI account is hacked, the perpetrators gain access to the UPI user’s entire bank account. However, in case of e₹, only the CBDC wallet and the money in it at that time will be vulnerable. This means that if a CBDC account is hacked, the hackers can withdraw money only from the wallet, not from the linked bank account.
If the e₹ can potentially reach a larger base of our population, it can let the RBI carry out more focused monetary policies to enhance the state of the economy. CBDC can also help lower the dependency on conventional banking systems. For cross-border payments as well, CBDC can facilitate faster and cheaper transactions along with lower costs and delays. This can potentially give a lift to the country’s commerce and investments by facilitating smooth worldwide transactions.
Difficulties and food for thought
It is true without doubt that the e-Rupee offers several advantages to the Indian ecosystem. But getting CBDC up and running to match the reach of cash and UPI will not be without difficulties.
Developing and presenting a strong CBDC infrastructure calls for large technological and financial commitments. So far, we’ve seen that the Reserve Bank of India (RBI) is fully invested in making both the retail and wholesale segments of the CBDC a success. This will have to be continued by them for the foreseeable future, till CBDC becomes mainstream.
One way in which CBDC is similar to UPI is that the transactions can be monitored, which will raise concerns over privacy and issues around surveillance. The regulatory bodies have to ensure that these concerns are addressed adequately and also that strong policies are put into place to make sure CBDC isn’t at risk of cyberattacks and frauds, the like of which we’re seeing with UPI these days.
Overall, including CBDC into India’s current payment system that is dominated by cash and UPI will need careful planning and coordination. Though there are obstacles to be solved, the possible advantages–better financial inclusion, more efficiency, and more openness–make this development exciting.
