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FinFIRST Blogs
The talk of the digital rupee, digital currency, or CBDC brings many questions to one’s mind. Is it a currency like Bitcoin? Or is it a platform like UPI? Is it a type of fund transfer like NEFT or IMPS? Is it a wallet and so on? We demystify Central Bank Digital Currency or CBDC by comparing it with UPI, NEFT, IMPS, and Cryptocurrency.
What is a digital currency (CBDC)?
A Central Bank Digital Currency (CBDC) is a form of digital currency issued by a country's central bank such as the Reserve Bank of India. It operates as a government-backed digital representation of a nation's official currency, such as the INR, Pound Sterling, or the Euro.
Unlike cryptocurrencies like Bitcoin, CBDCs are centrally controlled and regulated by the government. They are designed to provide a secure and efficient medium of exchange in the digital realm, aiming to enhance financial inclusion and reduce reliance on physical cash.
CBDCs offer potential benefits such as increased transparency, reduced transaction costs, and enhanced monetary policy tools for central banks.
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Types of digital currencies
There are various types of digital currencies, each with its unique characteristics such as:
1. Central Bank Digital Currency (CBDC):
Issued and regulated by a nation's central bank, CBDCs are digital representations of the official currency. They are considered the digital equivalent of physical cash and are backed by the government.
2. Cryptocurrencies:
These are decentralised digital currencies that use blockchain technology for security and transparency. Bitcoin, Ethereum, and Litecoin are well-known examples. Cryptocurrencies operate independently of central authorities.
3. Utility Tokens:
These digital assets grant access to a specific blockchain or platform's services or products. Ethereum's Ether (ETH) is a prime example, used to pay for smart contract execution.
4. Security Tokens:
Represent real-world assets such as stocks, bonds, or real estate on a blockchain. They provide ownership and, in some cases, dividends or voting rights.
5. Non-Fungible Tokens (NFTs):
These unique digital assets represent ownership of digital or physical items, often used in art, collectables, and gaming.
6. Centralised Digital Currencies:
Created and controlled by private companies or organisations, examples include Facebook's Diem (formerly Libra) and JPMorgan's JPM Coin.
What is cryptocurrency?
Cryptocurrency is a type of digital or virtual currency that relies on cryptography for security. Unlike traditional currencies issued by governments (e.g., the Indian Rupee), cryptocurrencies operate on decentralised technology called blockchain, which is a distributed ledger that records all transactions across a network of computers. Prominent examples include Bitcoin and Ethereum.
Cryptocurrencies enable peer-to-peer transactions without the need for intermediaries like banks. They offer decentralisation, immutability, and transparency, making fraud and manipulation more challenging. Users store their cryptocurrency holdings in digital wallets, secured by private keys.
One key feature of cryptocurrencies is their limited supply, often defined by a predetermined algorithm. This scarcity can lead to speculative investments. Additionally, cryptocurrencies have diverse use cases, including online purchases, remittances, and as a store of value.
| Difference | CBDC e-Rupee | UPI | NEFT | IMPS | Cryptocurrency |
| Status | Central Bank Digital Currency is a legal tender and is the digital avatar of the country’s fiat currency. | Unified Payments Interface facilitates real-time digital payment options through an inter-bank interface on peer-to-peer and peer-to-merchant transactions. | National Electronic Funds Transfer is used by bank customers to transfer funds to other NEFT-enabled bank accounts on a one-to-one basis. | Immediate Payments Service offers inter-bank electronic transfer of money. It can be done 24X7, even on holidays, and through phone as well as net banking | It is an umbrella term for various digital currencies that are used as a medium of exchange through the computer network. |
| Purpose | It is introduced as a digital alternative to the national currency as well as a legal alternative by RBI to cryptocurrency. | Its purpose is to act as an interface for payments. | It offers online fund transfers between bank accounts. | Like NEFT, it too offers online fund transfers between bank accounts. | To create an alternate digital currency. People can make and receive private and confirmed transactions, in real-time. |
| Types | CBDC is being classified under wholesale and retail categories. | There are no types, but different participants in UPIs. This includes bank account holders, merchants, NPCI, payer and payee PSPs, remitter, and beneficiary banks. | NEFT itself is a type of fund transfer. However, there are no further types of NEFT. | Like NEFT, IMPS is another type of fund transfer. IMPS can be made using a bank account and IFSC, using ATMs, SMS banking, and using mobile numbers, and MMID. | There are many types or kinds of cryptocurrency. Based on market capitalisation, the prominent ones include Bitcoin, Ethereum, Tether, USD Coin, BNB, XRP, Cardano, Polygon, Polkadot, and Dai. |
What are UPI, NEFT, and IMPS?
Leveraging the digital advancement in the banking sector, financial institutions offer online fund transfer methods through UPI, NEFT, and IMPS. Unlike cryptocurrencies, these online transactions include banks as an integral part of the money transfer process.
1. UPI (Unified Payments Interface):
UPI is a real-time payment system widely used in India. It allows individuals to instantly transfer funds between bank accounts via a smartphone app or internet banking. Users link their bank accounts to a UPI ID, making transactions convenient and secure. UPI has revolutionized digital payments, enabling various services like bill payments, online shopping, and peer-to-peer transfers.
2. NEFT (National Electronic Funds Transfer):
NEFT is an electronic fund transfer system in India managed by the Reserve Bank of India (RBI). It operates in batches and is typically used for interbank transactions. NEFT transactions have specific time slots, making them less immediate compared to UPI. It is suitable for non-urgent, large-value transfers.
3. IMPS (Immediate Payment Service):
IMPS is another electronic fund transfer system in India, offering real-time interbank transactions 24/7. It's known for its speed and convenience, making it suitable for instant payments, including person-to-person transfers, bill payments, and online shopping.
These systems have significantly contributed to India's digital payment ecosystem, offering options for different transaction needs, from quick and small payments through UPI to larger, less time-sensitive transactions via NEFT and instant transfers with IMPS.
To sum up
CBDC is the legal and government-recognised alternative to fiat currency that serves a lot of purposes. Unlike cryptocurrency, it is free from speculation as its value is backed by the national currency. It is also more than an interface or fund transfer mode but is expected to improve digital payments further.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.
