Regional developments in CBDCs and implications for India

Like the rest of its global peers, India relies on the existing correspondent banking model for cross-border remittances, which require the participation of multiple banks, with transactions recorded on different ledgers that are backed by different technologies and diverse message formats being followed.

On 22 March 2022, Project Dunbar – a collaborative effort between the Monetary Authority of Singapore, the Reserve Bank of Australia, Bank Negara Malaysia and the South African Reserve Bank – concluded the development of working prototypes of a common platform for multiple central bank digital currencies (CBDCs), with the objective of enabling cheaper, faster and safer cross-border payments.

The success of this project is also critical to India’s own CBDC project, the digital rupee, which is likely to adopt cross-border remittances as one of its main objectives in light of India historically being among the world’s largest receiver of remittances, aggregating about USD87 billion and occupying the top position in 2021.

Although Project Dunbar’s platform is aimed at exploring cross-border settlements on the wholesale side, inter se financial institutions, these efforts positively and significantly complement in parallel the harmonisation of cross-border retail payment systems. India has been pushing for greater adoption of the National Payment Corporation of India-developed (NPCI) unified payments interface (UPI).

In February, Nepal became the first country to adopt and deploy the UPI system. A recent Asian Development Bank project aims to provide support to the NPCI in accelerating digital payments and promoting co-operation on matters related to fintech across Asia. However, other countries may not be willing to adopt the UPI system, making bilateral or regional co-operation on payments difficult. Hence, a common platform for multiple CBDCs may present an alternative channel for India to link up to other regional and global markets through the intermediation of incumbent financial institutions.

To operationalise the various models for cross-border CBDC platforms, various jurisdictions have to focus on harmonising several legal and regulatory aspects, including oversight and supervisory frameworks, applying anti-money laundering and combating the financing of terrorism frameworks consistently, standardising data frameworks (including know-your-customer and sharing of information necessary for customer identification and beneficial ownership), and considering cross-border use cases while designing CBDCs.

In the context of Indian law, the process of amending various legislation to provide for the digital rupee has already begun, with a proposed amendment to the Reserve Bank of India Act, 1934 (RBI Act), under the Finance Bill, 2022, to the effect that the definition of “bank note” will include bank notes in digital form as well.

The design of the digital rupee, whether it is account-based or follows a tokenised architecture, whether it is programmable (and who retains control), what the limits on pseudonymity will be, its interest-bearing capabilities, accessibility and other controls on the account, will all require amendments. The financial products and services that will be stacked on top of the digital rupee architecture, including digitised negotiable instruments and smart-contract applications, may require a review of the regulatory guidelines issued by the RBI.

In that respect, the operationalisation of Project Dunbar could present key learnings for India and the RBI, in particular in three areas: (1) considerations in relation to the governance of the multi-CBDC platform (common standards for onboarding of users, access to hold or transact, and framing of decision-making processes to achieve interoperability and universality while ensuring autonomy of various central banks); (2) efforts for harmonising processes involved in cross-border remittances and settlements (including aspects of foreign currency exchange); and (3) framing of technological standards. The legislative and regulatory changes accompanying the operationalisation of the multi-CBDC platform may present a roadmap to Indian policymakers.

India’s upcoming G20 presidency, between December 2022 and November 2023, offers an opportunity for India and other Asian partners to engage constructively in developing an institutional platform to further the G20 agenda on boosting cross-border payments developed by the Financial Stability Board, the Bank for International Settlements Committee on Payments and Market Infrastructure, and other international standard-setting agencies.

The institutional platform could potentially help onboard new partners to multi-CBDC platforms and expand the range of regulatory co-ordination, including in other areas of the financial sector, which may bring several benefits to Asian and global economic corridors.

Anu Tiwari is a partner and Arjun Goswami is a director of public policy at Cyril Amarchand Mangaldas