CBDC: A new era beckons
Dear Readers,
If you can't beat them, join them, goes the adage. And central banks across the globe are going full tilt on this advice to take on cryptocurrencies, which have undermined and threatened their sovereignty, on their turf. After dithering for a long time, global central banks are ushering in a new chapter in the ongoing digital revolution: currencies of their own. About ten countries have launched a CBDC and another 17 are in the pilot stage, while 90 per cent of central banks are inclined towards having a CBDC, according to the Bank of International Settlement (BIS) report.
Central banks globally now see multiple use cases of CBDCs from greater financial inclusion to lower cash management costs to swift cross-border payments to ensuring financial stability in the wake of the crypto surge.
The major action on this front was unveiled this week when, as if acting in a formation, a few central banks showcased the progress on cross-border payments using CBDCs. Earlier in the week, India launched a pilot of the wholesale digital currency, which will be followed by a test of a retail CBDC.
"Use of e₹-W is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk," the Reserve Bank of India said on its wholesale e-rupee initiative.
Governor Shaktikanta Das said CBDC is going to be a major transformation in the way business is done — the way transactions are conducted and highlighted that RBI is among the very few central banks in the world which have taken this initiative.
In fact this week itself, Monetary Authority of Singapore (MAS) started a wholesale CBDC project Ubin + for cross-border payments.
Project Mariana
Later in the week, the BIS launched a new project with the central banks of Singapore, France and Switzerland to study the possibility of integrating some decentralised finance (DeFi) features with CBDCs.
Project Mariana will explore the exchange and settlement of Swiss franc, Euro and Singapore dollar wholesale CBDCs with an automated market maker (AMM) arrangement.
An AMM is a type of smart contract that adopts liquidity pools to transfer digital assets automatically, as opposed to the traditional process of matching buyers and sellers, according to the BIS.
“As DeFi and its applications have the potential to become systemically important parts of the financial ecosystem, central banks need to understand their impact for cross-border payments,” the BIS said.
The concept of such AMM protocols could form the basis for a new generation of financial infrastructures that facilitate cross-border exchanges of CBDCs.
Earlier, BIS concluded a pilot project called mBridge (also called as Multiple CBDC or mCBDC) to facilitate $22 million real-value cross-border transactions involving the central banks of Hong Kong, Thailand, China and the United Arab Emirates, along with 20 commercial banks from those regions.
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The Group of 20 nations has made cross-border payments a priority with a comprehensive programme to address challenges to it.
All this points to the arrival of a new system that would revolutionise the flow of money across borders that defies cost, speed, transparency and access barriers.
How CBDCs benefit India
For India, the progress on cross-border payments using CBDCs signifies a milestone as big as the UPI.
As India already has robust and thriving payment systems, the CBDC may not make much difference in retail. But it can make a big impact in India's goal of becoming an economic superpower by 2047.
Cost-effective and efficient cross-border transactions will help in higher integration of the Indian economy in global trade and capital flows.
With over $85 billion in remittances by the Indian diaspora, a CBDC would cut costs, facilitate the swift transfer of money and aid the internationalisation of the rupee.
However, while it brings in CBDCs, the RBI is also stepping into the unknown and untested, and should tread cautiously. But again, by bringing CBDC RBI has moved many steps ahead in the world of digital money moments, which is commendable.
Well, we interviewed Ishpreet Singh Gandhi from Stride Ventures for FinTech Diary this week and ETBFSI Explainer has all the details about RBIs designing of CBDC. Like always, I am adding here the top five stories of the week that you shouldn't miss. If you have any thoughts or feedback, please feel free to share them with me at amol.dethe@timesinternet.in.
Happy Reading, Happy Weekend
Amol Dethe,
Editor,
ETBFSI
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