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
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