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India’s banking regulator is in discussions with its counterparts in the US and Hong Kong, and the Society for Worldwide Interbank Financial Telecommunications (Swift), to assess the feasibility of quick and inexpensive digital cross-border settlements that will likely involve transacting through central bank digital currencies (CBDC), sources close to the development told ET.

An internal Reserve Bank of India (RBI) working group has been exploring the best technology path to develop a roadmap for such direct transactions between two countries. CBDC, or the equivalent of paper money in a digital form, has the potential to be a game-changer, particularly in facilitating cross-border settlements that currently require the Swift platform for routing 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 Payment Transformation, PwC India. “The advantages are substantial, but India will also need to address numerous challenges and proactively mitigate associated risks.”

The developments come at a time when India has set up agreements for real-time cross-border fund transfer systems with countries such as Singapore and the UAE. Over the past year, the RBI has also on multiple occasions highlighted the key role that CBDCs can play in quicker and cheaper cross-border payments.

An email sent to the RBI did not receive a response until publication of this report.

Industry experts also said that instant settlements at a predefined exchange rate will empower companies to manage their fund positions effectively.

The RBI, which had launched wholesale and retail CBDC pilots in 2022, has said that it is committed to promoting the ‘e-rupee’ for domestic transactions by expanding acceptance, introducing new use cases, and collaborating closely with ecosystem partners.

Also read | RBI seeks ways to make digital currency payments easy as cash

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 for 1 million transactions a day by December for the retail CBDC.

“You need like-minded counterparties in other countries that are also interested in figuring out if wholesale CBDC can enable/be a catalyst for non-USD cross-border settlement, and additionally, reduce transaction costs (as bilateral rails) compared with incumbent global rails,” said Vijay Mani, Partner, Banking and Capital Markets leader, Deloitte India.

The Euro System is proceeding with explorations around the digital euro and aiming to finalize the investigation 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 having been downloaded.

The US Federal Reserve and Brazilian authorities have also been piloting CBDCs.

“The US has FedNow and India has UPI. Both are real-time settlements, and they can easily do the XB money movement as they can manage counterparty risks,” said Uttam Nayak, former head of emerging products- digital, Visa Inc, and now an independent consultant. “Such systems and arrangements become easier due to the real-time nature of money movement. The adoption will be slow, but these are all the ways where CBDC can make inroads.”

A recent Bank of America report said that central banks from nations constituting 67% of the global landscape and accounting for a substantial 98% of the total global gross domestic product (GDP) are presently experimenting with CBDCs. The report also said that a third of these central banks are in advanced stages of CBDC development.

  • Published On Nov 28, 2023 at 07:43 AM IST

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