IAS Gyan

Daily News Analysis


6th September, 2023 Economy

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Picture Courtesy: Indian Express

Context: Recently, some of the leading banks in the country, such as State Bank of India, Bank of Baroda, etc., have enabled UPI interoperability on their digital rupee applications. This means that customers of these banks can now use any UPI-enabled app to access their bank accounts and make transactions.


  • Interoperability in payment systems means that various payment systems can function together, allowing users and providers to perform transactions across different systems without the need for multiple accounts or complex integration.
  • UPI QR code-CBDC interoperability refers to the ability of users to make payments and conduct transactions using a single QR code that is compatible with both the UPI (Unified Payments Interface) system and the digital rupee, which is a Central Bank Digital Currency (CBDC) issued by the Reserve Bank of India (RBI).

Key points about interoperability

  • Technical Compatibility: Interoperability relies on technical standards and protocols that enable different systems to understand and process information from each other. This compatibility ensures that data and transactions can be exchanged without errors or disruptions.
  • Cross-System Transactions: Interoperability enables users to conduct transactions across different payment systems seamlessly. For example, it allows a user of one bank's payment app to send money to a user of a different bank's payment app without any friction.
  • Efficiency: Interoperability enhances efficiency by reducing the need for duplicate efforts and multiple intermediaries. It streamlines processes and simplifies interactions, benefiting both service providers and end-users.
  • Promotes Innovation: When systems are interoperable, it encourages innovation because developers can build upon existing systems or integrate new features and services more easily. This promotes the creation of a richer and more diverse ecosystem of applications and services.
  • Enhances User Experience: Interoperability is customer-centric, as it provides users with more choices and greater convenience. Users can choose the payment systems they prefer and still transact with others who use different systems.
  • Fosters Competition: By allowing different systems to compete on a level playing field, interoperability can foster healthy competition in the market, which can lead to improved services and lower costs for consumers.

How UPI QR code-CBDC interoperability works and its implications:

  • Compatibility: With interoperability in place, all UPI QR codes are designed to work seamlessly with CBDC apps. Initially, when the retail digital rupee (eā‚¹-R) was launched, users of this digital currency had to scan a specific QR code to initiate transactions. However, interoperability eliminates the need for a separate QR code for CBDC transactions.
  • Single QR Code: Interoperability simplifies the payment process by allowing users to make payments using a single QR code, regardless of whether they are using UPI or CBDC apps. This means that users can use their preferred digital payment method (either UPI or CBDC) to scan the same QR code to complete transactions.
  • Digital Rupee (CBDC): The digital rupee, issued by the RBI, is a tokenized digital version of the Indian rupee. It is held in a digital wallet, which is typically linked to a customer's existing savings bank account. This digital currency is designed to facilitate secure and efficient digital transactions.
  • UPI (Unified Payments Interface): UPI is a widely adopted payment system in India that allows users to link their bank accounts to a mobile app and make digital payments seamlessly. It is directly linked to a customer's bank account, and users can transact with ease using UPI-based apps.
  • Benefits: The interoperability between UPI and CBDC offers several advantages. It simplifies the user experience, as customers can use a single QR code for payments, regardless of the payment method chosen. It also benefits merchants, as they do not need to maintain separate QR codes for UPI and CBDC payments, streamlining their operations.
  • Increased Adoption: This interoperability is expected to drive the adoption of the digital rupee (CBDC) because UPI is already a widely accepted and popular payment method in India. Users who are familiar with UPI can easily transition to using CBDC for their digital transactions without the need for significant changes in their payment habits.

UPI QR code-CBDC interoperability aims to make digital payments more convenient, efficient, and user-friendly for both consumers and businesses while promoting the adoption of the digital rupee as a secure and accessible digital currency.


Benefits for Customers

  • Convenience: Customers benefit from the convenience of using a single digital payment method for a wide range of transactions. They no longer need to switch between multiple apps or payment platforms to make payments, which simplifies their digital payment experience.
  • Seamless Transactions: With interoperability, customers can initiate transactions with digital rupees (CBDC) by scanning any UPI QR code at merchant outlets. This means they can use their preferred payment method (CBDC) while enjoying the widespread acceptance of UPI QR codes.
  • Expanded Use Cases: Customers can use CBDC for various everyday needs, such as purchasing groceries and medicines. This versatility makes CBDC a practical and viable digital payment option for a broad spectrum of transactions.

Benefits for Merchants

  • Simplified Payments: Merchants benefit from a streamlined payment process. They do not need to maintain separate QR codes for UPI and CBDC payments, reducing the administrative burden and complexity of managing multiple payment methods.
  • Enhanced Acceptance: Merchants can accept CBDC payments on their existing UPI QR codes. This broadens their customer base and encourages more users to make payments using CBDC, as it doesn't require additional setup or investment.
  • Increased Transactions: The interoperability between UPI and CBDC is expected to boost the volume of CBDC transactions. When customers can conveniently use CBDC for their payments through the UPI network, more transactions are likely to occur, benefiting merchants by increasing their sales.
  • Flexibility: Even if a merchant does not have a CBDC account, they can still accept payments from customers using UPI. This flexibility ensures that merchants do not miss out on potential sales, regardless of the customer's chosen payment method.

Overall, UPI QR code-CBDC interoperability enhances the digital payment ecosystem by simplifying transactions for both customers and merchants. It encourages the adoption of CBDC by leveraging the extensive UPI network while maintaining the flexibility for users to use either UPI or CBDC for their payments. This convenience and flexibility contribute to a more efficient and customer-friendly digital payment environment in India.

Interoperability between UPI and CBDC (Central Bank Digital Currency) can increase adoption of CBDC for several key reasons:

  • Leveraging UPI's Popularity: UPI is already a widely adopted and popular digital payment method in India. It is supported by numerous mobile apps and accepted by a vast network of merchants. By making CBDC interoperable with UPI, CBDC can tap into this existing user base and infrastructure, allowing users to seamlessly transition from UPI to CBDC for their digital transactions.
  • User Convenience: Interoperability simplifies the user experience. Customers who are familiar with using UPI for their payments can continue to do so while also having the option to use CBDC for their transactions. This choice and flexibility make it easier for users to embrace CBDC without the need for a significant change in their payment habits.
  • Merchant Acceptance: With interoperability, merchants do not need to make significant adjustments to accept CBDC payments. They can continue to use their existing UPI QR codes and payment infrastructure to process CBDC transactions. This encourages more merchants to accept CBDC payments, further expanding the acceptance network.
  • Widespread Access: The combination of UPI's extensive reach and CBDC's digital nature means that CBDC can be accessed by a large portion of the population, including both urban and rural areas. This accessibility helps in increasing the overall adoption of digital currencies.
  • Ecosystem Growth: The interoperability between UPI and CBDC encourages innovation within the digital currency ecosystem. Developers and businesses may create new applications and services that leverage both UPI and CBDC, leading to a richer and more diverse ecosystem. This, in turn, attracts more users and merchants to CBDC.
  • Promotion by Authorities: The endorsement and support of the Reserve Bank of India (RBI) and other regulatory authorities for interoperability initiatives can instil confidence in users and businesses regarding the safety and legitimacy of CBDC. Regulatory backing plays a crucial role in driving adoption.
  • Increased Transaction Volume: As CBDC becomes more accessible through UPI, the volume of CBDC transactions is likely to increase. The convenience of interoperability encourages users to explore CBDC for a broader range of transactions, which can lead to higher adoption rates.
  • Digital Payment Ecosystem Enhancement: The seamless integration of CBDC with UPI enhances the overall digital payment ecosystem in India. It provides users with more choices and flexibility while promoting the digitization of the economy.


  • Interoperability with UPI can act as a catalyst for CBDC adoption by leveraging the existing UPI infrastructure, offering convenience to users and merchants, and fostering growth and innovation within the digital currency ecosystem. This integration has the potential to make CBDC a widely accepted and used digital payment method in India, contributing to the country's digital transformation.

Must Read Articles:

CENTRAL BANK DIGITAL CURRENCY (CBDC): https://www.iasgyan.in/daily-current-affairs/central-bank-digital-currency-cbdc

UPI: https://iasgyan.in/daily-current-affairs/upi-4


Q. What are the key features of a Central Bank Digital Currency (CBDC), and what is their significance in the modern financial landscape? What are some of the primary challenges associated with the implementation and adoption of CBDCs, and what strategies can central banks and governments pursue to address these challenges as they pave the way forward for CBDC adoption and integration into the broader economy?