There has been some misunderstanding over how digital currency and UPI fit together since the pilot programme for the retail central bank digital currency launched.
Shaktikanta Das, governor of the Reserve Bank of India (RBI), explained the distinction between the digital rupee and the Unified Payments Interface (UPI) on December 7. Das outlined the distinctions between the two during the news conference following the announcement of the policy.
The context for the RBI clarification was the recent buzz surrounding the pilot retail central bank digital currency (CBDC) launch within a closed user group about the roles of digital currency and UPI.
Retail Digital Rupee (e- R) Pilot Launched
On December 1, the RBI launched a retail digital rupee (e- R) pilot. The central bank has identified eight banks to participate in the first phase of the two-phase project.
Intermediation
Das pointed out that UPI transactions must go through a bank, whereas digital currency transfers money from wallet to wallet without the involvement of a bank.
“Any UPI transaction involves intermediation of the bank…. In CBDC, just as paper currency users go to the bank, draw currency and keep it in their purse, similarly, here also users can draw the digital currency and keep it in their mobile phone wallet and make payments. It will move from one person’s wallet to the other person’s wallet without the intermediation of the bank,” the RBI governor said.
“UPI is movement of money from bank account to bank account, and digital rupee is a payment of cash. It is possible that two private entities can be provided the wallet and money can be moved between them, which is not possible with UPI because UPI has to involve a bank for payment,” said RBI deputy governor T Rabi Sankar.
Anonymity
The governor also stated that anonymity is a key feature of digital currency because the currency will be transferred directly from one wallet to another, leaving no digital footprint. Das added that, just like with physical currency, a third party cannot determine to whom the money has been transferred because this information is not available with a bank.
Sankar went on to say that the CBDC, like cash, allows money to be transferred directly between two private entities, individuals or businesses. However, in UPI, the movement is limited to two bank accounts.
PAN Required for CBDC
Currently, anyone making a transaction over a specific threshold is required to provide their PAN. This was put in place to stop unauthorised transactions and stop the flow of illicit funds. Das claimed that the recently introduced digital money is subject to the same laws.
“The income tax department has got certain limits for cash payments like beyond a certain limit you have to give PAN number; the same rules will apply in the case of CBDC because both are currencies,” the governor added.
Amendments in RBI Act
According to Das, the central bank has made the necessary changes to the RBI Act to include digital currency. “The amendment in the RBI Act with regards to the CBDC says that currency will also include digital currency. There is no difference in paper currency and digital currency,” the governor said.
According to the RBI Act of 1934, which has since been amended, the Reserve Bank has the exclusive ability to create banknotes, as stated in the concept note on CBDC released on October 7.
Technological solutions
The central bank is also looking to tap tech for the digital currency. “We are looking at technological solutions and we understand that the technology is possible,” Sankar added.
