The Reserve Bank of India (RBI) is in the process of designing a framework for the launch of a central bank digital currency (CBDC) in 2023. A CBDC is essentially legal tender issued in a digital form distinct from a private cryptocurrency, which does not have a sovereign legal backing.
Many jurisdictions are driven by the goals of financial inclusion and push towards digital payments when considering whether to launch a CBDC. While these are certainly important goals for the RBI, the United Payments Interface (UPI) has already done a lot for digital payments in India. In fact, India’s digital payments architecture is viewed as one of the global best.
One area where a CBDC in India can power the next generation of innovation is cross-border payments. There are several challenges associated with cross-border payments today: involvement of multiple intermediaries, high costs, banks operating across multiple time zones with different cut-off times for payment processing, and long settlement timelines creating credit and foreign exchange risks.
Cross-border CBDC payment solutions have the potential to create a seamless, low-cost, and transparent system for cross-border payments that allows for real-time settlement. Person A1 in Country A could potentially transfer money to Person B1 in Country B instantly (as if Person A1 was handing over cash to Person B1) without the need for any inter-bank settlement at a fraction of the cost involved in such a payment today. However, careful thought, discussion, and effort is required to achieve this position.
Some of the key design and policy considerations that will need to be considered by the RBI when thinking through a CBDC that facilitates cross-border payments are:
Interoperability and integration with other central bank platforms: A cross-border CBDC payment solution will require the RBI to integrate with the payment infrastructure of other countries to ensure transaction processing and settlement not just cross-border but also cross-currency. When designing its CBDC infrastructure, the RBI should ideally provide for such cross-border inter-operability, and data flows.
Access: The RBI will also need to decide whether to restrict cross-border CBDC solutions to wholesale payments or also permit retail users to access such infrastructure. If retail use is permitted, questions such as whether access will be permitted to residents only or also to non-residents (either physically present in India for business or travel, or even when not in India) will have to be determined.
Alignment of legal rules and governance frameworks: Cross-border integration will only be possible if both jurisdictions are broadly aligned on the legal rules that govern the CBDCs. For example, if India does not permit anonymous CBDC wallets, but Country A adopts an anonymous CBDC framework, the RBI may not be comfortable accepting or allowing payments to a digital account or wallet that does not meet baseline KYC and AML/CFT requirements. Early co-ordinated global discussions will be critical to ensuring alignment of multiple regulatory frameworks on core principles of CBDC governance.
Capital account controls: Any cross-border CBDC payment solution will need to operate within the boundaries of foreign exchange regulations that apply to transactions between residents and non-residents. If the RBI itself issues wallets where retail users can hold the CBDC, it will then also need to create a supervisory system to monitor transactions (the volume of transactions can be significant if retail access is permitted).
The one significant advantage that India has over many other jurisdictions is its existing digital payments infrastructure. The UPI is already interoperable with payment systems in Singapore, Bhutan, and Nepal. The NPCI International Payments Ltd. (a wholly-owned subsidiary of NPCI) has been mandated with focussing on international acceptance of the UPI infrastructure, which could also potentially be leveraged for the CBDC-based cross-border payment solutions.
A CBDC will allow for innovation not just in payments but across several areas of financial markets. One such example is linked to financial instruments issued on the blockchain or distributed ledger technology (DLT). The RBI (and possibly even private issuers) will have the ability to issue digital bonds using the DLT where payment and settlement is done via the CBDC which could significantly lower costs of raising capital and also improve access to international financial markets.
India, with its very sophisticated digital payments infrastructure, is well positioned to be a leader in the global digital payments space. The RBI may very well be one of the first central banks of a large economy to develop and launch a CBDC framework. It should ideally make design and policy choices that allow for not just domestic use-cases but also cross-border payment solutions, which can become a model for other jurisdictions.
Shilpa Mankar Ahluwalia is Partner & Head — FinTech, Shardul Amarchand Mangaldas. Views are personal, and do not represent the stand of this publication.
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