India’s banking regulator is in discussions with its counterparts in the United States and Hong Kong, and the Society for Worldwide Interbank Financial Telecommunications (Swift), to assess the feasibility of fast and low-cost digital cross-border settlements that are likely to involve central bank digital transactions. coins (CBDC), sources close to the development told ET.
A Reserve Bank of India (RBI) working group has explored the best technological path to develop a roadmap for such direct transactions between two countries. CBDC, or the equivalent of paper money in digital form, has the potential to be a game changer, especially in facilitating cross-border settlements, which currently require the Swift platform to route funds through banks.
“While the current practice involves settling transactions through traditional banking channels, CBDC could enable direct settlement between parties,” said Mihir Gandhi, Partner and Leader of Payments Transformation, PwC India. “The benefits are great, but India will also have to address many challenges and proactively mitigate associated risks.”
The developments come at a time when India has set up agreements for real-time cross-border tracking systems with countries like Singapore and the UAE. Over the past year, the RBI has also repeatedly emphasized the key role that CBDCs can play in faster and cheaper cross-border payments.
An email sent to the RBI did not receive a response till publication of this report.
Industry experts also said that instant settlements at a predetermined exchange rate will enable companies to effectively manage their fund positions.
The RBI, which launched wholesale and retail CBDC pilots in 2022, said it is committed to promoting the “e-rupee” for domestic transactions by expanding acceptance, introducing new use cases and working closely with ecosystem partners.
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The wholesale CBDC pilot was initially launched for trades in government securities and now includes some money market segments. The central bank has a target of 1 million transactions per day by December for the retail CBDC.
“You need like-minded counterparties in other countries who are also interested in finding out if wholesale CBDC can enable/be a catalyst for non-USD cross-border settlement, and also reduce transaction costs (like bilateral railways) compared to current global rails,” said Vijay Mani , Partner, Banking and Capital Markets, Deloitte India.
The Eurosystem is continuing with research around the digital euro and aims to end the research phase by October 2023, according to the International Monetary Fund (IMF). China is conducting a large-scale CBDC pilot in several regions, with hundreds of millions of wallets downloaded.
The US Federal Reserve and Brazilian authorities are also piloting CBDCs.
“The US has FedNow and India has UPI. Both are real-time settlements, and they can easily do the XB money movement because they can manage counterparty risks,” said Uttam Nayak, former head of emerging products – digital, Visa Inc, and now independent a consultant “Such systems and arrangements are made easier by the real-time nature of money movement. The adoption will be slow, but these are all ways that CBDC can come in.”
A recent Bank of America report said that central banks of nations making up 67% of the global landscape and accounting for a whopping 98% of total global gross domestic product (GDP) are currently experimenting with CBDCs. The report also said that a third of these central banks are in advanced stages of CBDC development.