CBDCs vs UPI: Which One is Right for You?


In recent years, the world of digital payments has seen significant developments with the emergence of new technologies and systems. 

Two of the most talked-about payment systems are Central Bank Digital Currencies (CBDCs) and the Unified Payments Interface (UPI). 

Both UPI and CBDCs offer advantages over traditional payment methods, but they also have their own drawbacks and limitations. 

Choosing between them can be a challenging task, especially for those who are unfamiliar with their features and functionalities. 

In this blog, we will compare CBDCs and UPI to help you understand the differences between the two and guide you in choosing which one is right for you.

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    What is CBDC?

    Central Bank Digital Currencies (CBDCs) are digital currencies that central banks issue with government support. It can be used as a secure and efficient medium of exchange and store of value. Many countries are creating their own CBDCs with various features and capabilities.

    When delivering the Union Budget for 2022–23, Finance Minister Nirmala Sitharaman revealed that the RBI would issue Digital Rupee or Central Bank Digital Currency (CBDC) in the upcoming fiscal year.

    How does it Work?

    The process of CBDC issuance, distribution, and use involves a digital payment system built on a blockchain or a centralized database. Depending on the central bank’s setup, CBDCs can be issued in either an account-based or a token-based format

    While token-based CBDC functions like digital cash that may be kept offline in a digital wallet, account-based CBDC functions like a digital bank account. The central bank may audit the distributed ledger on which CBDC transactions are kept, thus assuring security and transparency.

    Pros of CBDCs

    Cons of CBDCs

    Improved financial inclusion: CBDCs have the potential to expand access to financial services for individuals and businesses that are currently underserved by traditional banks.

    Privacy concerns: CBDCs could potentially give central banks more access to personal data, leading to privacy concerns and potential misuse of data.

    Strengthened monetary policy: CBDCs could enhance the ability of central banks to manage macroeconomic indicators such as inflation and interest rates.

    Potential for financial disintermediation: The introduction of CBDCs may decrease the requirement for conventional intermediaries such as banks, which may result in job cuts and a decline in economic activity.

    Streamlined tax collection: CBDCs may simplify tax collection by providing a transparent and traceable record of all transactions, making it easier to track and enforce tax obligations.

    Need for infrastructure and technological investment: The adoption of CBDCs would entail significant investment in technological infrastructure, which might be a considerable burden for certain countries.

    What is UPI?


    Unified Payments Interface (UPI) is a real-time payment system developed by the National Payments Corporation of India (NPCI) to enable instant, secure, and convenient digital transactions between bank accounts.

    UPI has gained massive popularity in India, with millions of users and billions of transactions being processed every month.

    How does it work?

    UPI enables instant money transfers between bank accounts using a mobile device. Users can link their bank account to a UPI-enabled mobile app and make transactions using a virtual payment address or account number and IFSC code. 

    Did you know? UPI payments can now be done without the internet through IVR numbers! 

    It allows users to transfer money, make payments, and check their account balances using a mobile phone.

    The user needs to enter the beneficiary’s virtual payment address (VPA) or UPI ID, enter the payment amount, and confirm the transaction with a PIN or biometric verification in order to make a payment. The funds are promptly credited to the recipient’s bank account when the transaction has been processed.

    Pros and Cons of UPI Payments

    Pros of UPI Payments

    Cons of UPI Payments

    Instantaneous: UPI transactions are practically instant since they are processed in real-time. This implies that money is sent quickly, making it very convenient for users who want to make urgent payments.

    Limited Acceptance: Even though UPI is becoming more popular in India, it is still not extensively used outside of India. This may reduce its value when making international transactions.

    User-friendly: With UPI, users may send and receive money without having to remember their bank account numbers or IFSC codes. This comes in handy for not-so-tech-savvy users.

    Security concerns: UPI transactions have reportedly been exposed to fraud and hacking. To avoid any unwanted access to their accounts, users must exercise caution and make sure that only reliable and secure UPI apps are used.

    Cost-effective: UPI transactions are typically very affordable or even free, making it an accessible form of payment for both individuals and small businesses.

    Technical issues: UPI transactions may sometimes fail due to technical glitches or network issues. This can cause inconvenience to users who need to make urgent payments.

    How is CBDC Different from UPI?

    Factors CBDCs UPI
    Security Due to their decentralized and tamper-proof structure, CBDCs are considered to be more secure than UPI. They are typically issued on a blockchain, which makes it harder for fraudsters to tamper with or counterfeit them. UPI, on the other hand, relies on traditional encryption techniques and is susceptible to online fraud, phishing, and other cyberattacks.
    Speed Due to the steps involved in validating and verifying transactions for CBDC, transactions may take longer. UPI transactions are usually faster than CBDCs as they are processed in real time.
    Accessibility CBDC, on the other hand, requires users to have access to a digital wallet or a bank account, which may not be available to all individuals, particularly those who are unbanked or underbanked. Compared to CBDC, UPI is more accessible. It is generally accessible on most smartphones and open to all users with a bank account.
    Acceptance CBDCs are still in the development phase and are yet to be adopted on a large scale, although several countries, such as China and the Bahamas, have already launched their CBDCs. UPI is more widely accepted than CBDC, particularly in India, where it is the most popular payment system.

    Whether you want to choose CBDC over UPI or vice versa, it all comes down to your personal preferences and objectives.

    For instance, if you prioritize security and government-backed assurance, CBDCs may be the way to go. If you prioritize speed, accessibility, and low transaction costs, UPI may be the better option.

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    With the advent of UPI payments, digital payments have significantly increased in India over the past several years. With over Rs 12.98 lakh crore in transaction value in January 2023, it has experienced tremendous growth in the country. 

    And now with CBDC all set to be launched, the digital landscape of transactions is predicted to soar high.

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    Both UPI and CBDCs have their advantages and limitations, and the choice between the two depends on various factors, such as security, speed, accessibility, and acceptance. 

    CBDCs offer greater security and control to central banks, but they may be less accessible to the unbanked population and less widely accepted. 

    UPI, on the other hand, provides a fast, low-cost, and convenient way to transfer money, but it may have some limitations in terms of security and interoperability.

    Ultimately, the decision between CBDCs and UPI comes down to the individual’s needs and circumstances. 

    Regardless of which payment system you choose, it’s essential to be aware of its features and limitations to make an informed decision.


    1. What is the difference between the digital rupee and UPI payment?

    One of the most significant differences between the e-Rupee and UPI is that the former is a currency in digital form, whereas the latter is just a platform for digital transactions.

    2. Will CBDC replace UPI?

    No, CBDCs won’t take the place of UPI; instead, they’ll make it more useful. CBDCs will serve as digital cash for retail payment systems like UPI.

    3. Will UPI become global?

    Yes, there is a chance for UPI to become global. Earlier this year, the National Payments Corporation of India (NPCI) stated that NRIs can soon start using UPI with their overseas mobile numbers.

    4. What is the disadvantage of UPI?

    For most people, the major disadvantage of UPI is that it requires a stable internet connection to function, which can be a barrier in areas with poor connectivity or unreliable network coverage. However, now UPI payments can be done even without the internet.

    5. Is CBDC safe?

    Since CBDCs are the liability of the Federal Reserve, they would be the most secure digital assets accessible to the general public, with no associated credit or liquidity risk.

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