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UPI QR Code-Central Bank Digital Currency Interoperability


Banks are enabling the interoperability of Unified Payments Interface’s (UPI) Quick Response (QR) code with their central bank digital currency (CBDC) or e₹ application.


GS III: Indian Economy

Dimensions of the Article:

  1. UPI QR Code-CBDC Interoperability: Simplifying Digital Transactions
  2. Understanding QR Codes
  3. The Role of Interoperability in CBDC Adoption
  4. What is E-rupee?

UPI QR Code-CBDC Interoperability: Simplifying Digital Transactions

  • UPI (Unified Payments Interface) QR code interoperability with the digital rupee (Central Bank Digital Currency or CBDC) means that UPI QR codes can seamlessly work with CBDC apps.
  • Initially, users of the e₹ (retail digital rupee) had to scan a specific QR code for transactions.
  • Now, with the interoperability in place, payments can be made using a single QR code.
How e₹ Works:
  • The e₹ is stored in a digital wallet, which is linked to the user’s existing savings bank account.
  • UPI, on the other hand, is directly linked to the user’s bank account.
Benefits for Customers and Merchants:
  • The interoperability of UPI and CBDC streamlines transactions for both customers and merchants, eliminating the need to switch between multiple digital platforms.
  • Digital rupee users can make payments for everyday essentials like groceries and medicines by scanning any UPI QR code at any merchant outlet.
  • Merchants do not need a separate QR code to accept digital rupee payments; they can use their existing QR code.
  • If the merchant has a CBDC account, the payment will be settled in the CBDC wallet.
  • If the merchant lacks a CBDC account, customers have the option to make payments using UPI.
  • In essence, UPI QR code-CBDC interoperability simplifies digital transactions, making it convenient for users of the digital rupee and ensuring that merchants can accept payments seamlessly without the need for additional infrastructure.

Understanding QR Codes:

  • A Quick Response (QR) code is a pattern of black squares arranged on a white background. It can be scanned and read by imaging devices like cameras.
  • These codes contain information related to the item or application they are linked to.
  • QR codes provide a contactless payment channel, enabling businesses to receive payments directly into their bank accounts.
The Role of Interoperability in CBDC Adoption:
  • Interoperability between UPI (Unified Payments Interface) and CBDC (Central Bank Digital Currency) is expected to boost the adoption of digital rupee.
  • UPI is currently a widely utilized payment method with more than 70 mobile apps and over 50 million merchants accepting UPI payments.
  • As of July, there were 1.3 million customers and 0.3 million merchants using the retail digital rupee (e₹-R).
  • Daily e₹-R transactions in July ranged from 5,000 to 10,000.
  • The seamless integration of CBDC with UPI will enhance the acceptance and usage of digital currencies in everyday transactions.

What is E-rupee?

  • E-rupee is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. 
  • Only its form is different. It can be accepted as a medium of payment, legal tender and a safe store of value.
  • The digital rupee would appear as liability on a central bank’s balance sheet.
What are the types of e-rupee?

Based on the usage and the functions performed by the digital rupee and considering the different levels of accessibility, CBDC can be demarcated into two broad categories —

Retail CBDC

  • It is an electronic version of cash primarily meant for retail transactions.
  • It will be potentially available for use by all — private sector, non-financial consumers and businesses — and can provide access to safe money for payment and settlement as it is a direct liability of the central bank.
  • However, the RBI has not explained how e-rupee can be used in merchant transactions in the retail trade.

Wholesale CBDC

  • It is designed for restricted access to select financial institutions.
  • It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market more efficiently and securely in terms of operational costs, use of collateral and liquidity management.
What are the forms of CBDC?

The central bank says e-rupee, or CBDC, can be structured as

Token-based CBDC

  • It would be a bearer instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them.
  • In a token-based CBDC, the person receiving a token will verify that his ownership of the token is genuine.
  • A token-based CBDC is viewed as a preferred mode for CBDC-R as it would be closer to physical cash.

Account-based system

  • It would require maintenance of record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances.
  • In this case, an intermediary will verify the identity of an account holder.
  • This system can be considered for CBDC-W.
What’s the model for issuance?

There are two models for issuance and management of CBDCs under the RBI’s consideration —

Direct model (single tier model)

  • The central bank will be responsible for managing all aspects of the digital rupee system such as issuance, account-keeping and transaction verification.

Indirect model (two-tier model).

  • An indirect model would be one where the central bank and other intermediaries (banks and any other service providers), each play their respective role.
  • In this model, the central bank will issue CBDC to consumers indirectly through intermediaries and any claim by consumers will be managed by the intermediary.
What are the advantages of e-rupee?
  • Reduction in operational costs involved in physical cash management,
  • It will foster financial inclusion,
  • It will bring resilience, efficiency and innovation in the payments system.
  • It will add efficiency to the settlement system and boost innovation in cross-border payments space and provide the public with uses that any private virtual currencies can provide, without the associated risks.

-Source: Indian Express

June 2024