UPI-CBDC Interoperability Boosts Digital Transactions

UPI QR Code and CBDC Interoperability: Streamlining Digital Transactions in India

The recent news highlights the growing trend of banks enabling the interoperability between the Unified Payments Interface (UPI) Quick Response (QR) code and their respective central bank digital currency (CBDC) or e₹ applications. Interoperability in this context refers to the technical compatibility that allows different payment systems to work together, enabling users to conduct transactions seamlessly across various platforms.

As a result of this development, users of the retail digital rupee will have the ability to make payments by scanning any UPI QR code at merchant outlets. Likewise, merchants will be able to accept digital rupee payments through their existing UPI QR codes. This integration of UPI and CBDC is part of the Reserve Bank of India's (RBI) ongoing pilot project aimed at promoting the adoption of the retail digital rupee, also known as e₹-R.

Central Bank Digital Currency (CBDC) is essentially a digital form of legal tender issued by a central bank. The digital rupee (e-Rupee) is India's own digital currency, functioning much like traditional fiat currency but in digital form. It can be exchanged one-to-one with physical currency.

The RBI has divided the digital rupee into two categories: general purpose (retail) and wholesale, based on its intended use and accessibility. Wholesale CBDC is designed for use in secondary trade in government securities and has the potential to enhance efficiency and security in various financial transactions, including government securities trading, interbank transactions, and capital market operations. Retail digital rupee (e-R), on the other hand, serves as an electronic version of cash for everyday transactions and is available to the private sector, non-financial consumers, and businesses. Banks act as intermediaries for its distribution, and it does not accrue interest but can be converted into other forms of money, such as bank deposits.

The interoperability between UPI and CBDC means that all UPI QR codes can be used with CBDC applications. Initially, during the pilot phase of the retail digital rupee, users had to scan specific QR codes for transactions. However, with this interoperability, payments can be made using a single QR code. The digital rupee is stored in a digital wallet linked to a customer's savings account, while UPI is directly connected to a customer's account.

This development is expected to benefit both customers and merchants by facilitating seamless transactions without the need to switch between multiple digital platforms. Digital rupee users can make payments for daily expenses, such as groceries and medicines, by scanning any UPI QR code at any merchant outlet. Merchants, too, do not need to maintain a separate QR code to accept digital rupee payments; they can accept CBDC payments using their existing QR codes. If the merchant has a CBDC account, the payment will be settled in the CBDC wallet; otherwise, there's an option to use UPI.

QR codes are a type of barcode consisting of black squares arranged in a square grid on a white background. They can store information about the associated item and are used as a contactless payment channel, allowing businesses to receive payments directly into their bank accounts.

The interoperability between UPI and CBDC is expected to boost the adoption of the digital rupee, given the widespread use of UPI as a payment method. Currently, more than 70 mobile apps and over 50 million merchants accept UPI payments. In July, an RBI Deputy Governor reported 1.3 million customers and 0.3 million merchants using the retail digital rupee, with daily transactions ranging from 5,000 to 10,000. This seamless integration with UPI is likely to enhance the acceptance and usage of digital currencies in everyday transactions.

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