India’s Unified Payments Interface (UPI) and the Reserve Bank of India’s (RBI’s) central bank digital currency (CBDC) are not substitutes, but different tools that will shape the future of money and payments in India, RBI Governor Shaktikanta Das said at an event in the US.
“The shape of money and the future of payments is going to be influenced largely by the rapid advancement that we have in technology in this particular space,” he said at the 39th annual International Banking Seminar in Washington, DC, on October 26, 2024.
Das was part of the panel to discuss the future of money and payments along with Andrew Bailey, the Governor of the Bank of England, and Agustin Carstens, former Governor of the Bank of Mexico and present general manager of the Bank for International Settlements (BIS).
Das highlighted two of the financial tools used in India for a fast, secure, and cost-effective payment system - UPI and CBDC.
Unified Payment Interface (UPI)
He said UPI has proved to benefit millions of users. UPI is fast, safe, instantaneous, and cheap. Just about a year ago, the per day UPI transactions in India were around 300 million which have now reached 500 million transactions per day, he said, adding that it will likely reach 1 million in the next few months.
UPI’s ease of transaction is not only for online transactions, but offline transactions as well. He said that for cross-border transactions also, UPI is beneficial for students, business travellers, and other frequent travellers.
Also, the QR code payment-based UPI payment linkage with neighbouring and a few other countries have been efficient.
“Going forward, the linkage of India’s UPI and the fast payment system of countries in the world, can make the global fast payment system much more efficient than it is today,” he said.
Central Bank Digital Currency (CBDC)
He said RBI’s CBDC has multiple use cases and it is still evolving.
It can be used by the government and corporate entities to disseminate financial benefits to people.
The CBDC amount given for a certain purpose can be used only for that targeted purpose. As such, it will increase the systemic efficiency, he added.
However, it is still in a pilot mode and will be launched for all only after RBI becomes fully satisfied with its systemic robustness, security measures, and operational efficiency, he said.
Still Some Challenges With CBDCs
While CBDC works on the same QR as UPI and works offline as well, there are some challenges.
As it is the digital form of paper currency and is online, it can result in faster transmission of shock, if there is economic uncertainty in one country.
Further, there is a risk of currency substitution or replacement of one country’s currency with another. Another challenge with CBDC is capital flow volatility due to faster money transfer across borders, said Das.
He emphasised that these are the challenges for which technological and systemic solutions have to be found and everybody needs to work together for this purpose.
Why CBDC If There Is UPI
While UPI has been here for a while and proved its worth, CBDC is new.
But the comparison should not exist as these are different.
Das said: “UPI is a payment system whereas CBDC is a currency. It's a liability on the books of the central bank. It is just a replacement for paper money.”
Future Of Money And Payment System
Das emphasised that UPI and CBDC are different and can go hand-in-hand and work in parallel. They will act as back-up for each other.
In case, the fast payment system in a country experiences a technical problem, they can have a back-up, the CBDC, to ensure the smooth running of the payments.
“They will act as both fast payment systems and CBDC will act as a back-up for each other in times of crisis or if there is a breakdown in one. We cannot rule out such possibilities. It can happen and we cannot be complacent about it.”
CBDC and fast payment systems have a lot of potential.
They are faster and offer efficient cross-border payments, he said.
He further said: “There is a need for greater multilateral cooperation in this area in all aspects, such as design, legal arrangements, etc.”
