CBCD Integration into Global Payment System & AML/CFT

 

The Digital Rupee (e₹) or eINR or E-Rupee is a tokenised digital version of the Indian Rupee, issued by the Reserve bank of India (RBI) as a Central Bank Digital Currency (CBDC). The Digital Rupee was proposed in January 2017 and launched on 1 December 2022. It operates as a form of digital currency issued and controlled by the Reserve Bank of India (RBI), using blockchain or distributed ledger technology for secure and transparent transactions. The e₹ is a digital form of currency notes unlike other cryptocurrencies such as bitcoin. e₹ has intrinsic value and is regulated by the RBI.

The Digital Rupee is introduced in India to enhance financial inclusion, providing greater access to formal financial services. It aims to promote efficiency in transactions through faster and more secure digital payment methods, align with the country's technological advancements, foster a digital-first economy, reduce dependence on physical currency, and enable better regulatory control over monetary transactions while countering potential illicit activities.

Types of CBDCs

CBDCs can be broadly categorized into two main types:

·         Retail CBDCs: Designed for use by the general public for everyday transactions, similar to how cash is used today.

·         Wholesale CBDCs: Intended for use by financial institutions for interbank settlements and other wholesale transactions.

Issuing Digital Rupee

The Reserve Bank of India (RBI) issues electronic tokens that can be exchanged on a one-to-one basis, with denominations similar to physical currency. The RBI controls the distribution of the Digital Rupee, distributing it to commercial banks or authorized financial institutions for circulation. Transactions made with Digital Rupee are recorded and verified on a secure ledger system for transparency and security.

Acquiring Digital Rupee

Users can acquire Digital Rupee through digital wallets provided by authorized financial institutions or other approved platforms. These wallets function as secure digital storage for the currency. Digital tokens can also be withdrawn, similar to withdrawing cash, and cash can be converted to eRupee using a UPI gateway.

 

Load e-Rupee

Users can load the required token amount or select different denominations of Digital Rupee through their linked Banked Account (Bank of Baroda Account) or Other UPI Account. If users have chosen "Other UPI Account," a list of all UPI apps available on their phone will appear. Users can select their preferred UPI app, enter their UPI PIN, and complete the transaction. The amount is debited from the Bank Account directly, and Digital Rupee is loaded in the wallet successfully.

Redeem e-Rupee

Users can redeem/unload wallet tokens to their linked bank account. Digital Rupee Tokens will be unloaded from their wallet, and the equivalent amount will be credited to their linked bank account.

Using Digital Rupee

Person-to-Person: Transfer money to another person’s wallet with a QR code or their mobile number.

Person-to-Merchant: Scan the QR code displayed at a merchant’s establishments (shops) to make a payment.

 

Features of Digital Rupee

 

·         The Digital Rupee is issued by the Reserve Bank of India and is legally recognized as a secure form of payment accepted by individuals, businesses, and governmental bodies.

·         Issuance follows the central bank's financial policies.

·         Holders have the freedom to convert Digital Rupee into physical cash through commercial banks.

·         Legal Tender: CBDCs are considered legal tender, usable for all types of transactions.

·         Central Bank Control: CBDCs are controlled and regulated by the central bank, ensuring stability and trustworthiness.

·         Programmable Money: CBDCs can have programmable features, such as smart contracts, enabling automated, self-executing financial agreements.

Advantages of Digital Rupee

 

·         Financial Inclusion: Provides opportunities for those without access to traditional banking services, allowing participation in the formal economy.

·         Reduced Transaction Costs: Eliminates intermediaries, leading to lower transaction costs compared to traditional banking systems.

·         Efficiency and Speed: Transactions are processed faster, often within seconds, regardless of geographical locations.

·         Transparency and Security: Blockchain ledger ensures transaction transparency while maintaining security through cryptographic protocols.

·         Government Control and Regulation: Being centrally regulated, the RBI can control the supply, circulation, and monetary policies associated with Digital Rupee.

Challenges and Concerns of CBDC

 

·         Privacy Concerns: The use of CBDCs raises questions about privacy, as transactions can be easily monitored and traced, potentially compromising individual financial privacy.

·         Cybersecurity Risks: CBDCs are susceptible to cyber-attacks, requiring robust security measures to protect the digital currency's integrity.

·         Disruption of Traditional Banking: Widespread adoption of CBDCs could disrupt traditional banking systems, potentially leading to bank runs and other systemic challenges.

·         International Implications: Global adoption of CBDCs may influence the international monetary system, raising concerns about the role of the U.S. dollar as the world's primary reserve currency.

Central Bank Digital Currency - India

The RBI has introduced Central Bank Digital Currency (CBDC) in pilot mode in India. It noted that CBDC reinforces the role of central bank money as an anchor for cross-border payments. According to the Central Bank, CBDCs reduce dependency on cash, lower currency management cost and reduce settlement risk. CBDC can streamline and improve cross-border transactions as they could reduce the cost of international remittances, minimise risks associated with multiple intermediaries, enhance efficiency through faster settlement times, and provide greater transparency in payment status. CBDC could also increase the availability of credit, the report said.

CBDC can also give rise to various macroeconomic and financial sector risks. They could increase tax avoidance and also give rise to issues such as currency substitution wherein countries with less stable currencies use stable foreign currencies , which could in turn affect exchange rates and India’s economy. Further, if CBDC offered more interest than cash, people may favour it more than traditional banking, which could affect a bank’s ability to lend.

The success and impact of CBDC depends on its design features. For example, reducing its availability and increasing its cost could reduce the economic risks. CBDC, if effectively designed, could also push traditional banking systems to have more competitive deposit rates. The G20 roadmap aims to “enhance the existing payment infrastructure, while outlining an international dimension into the design of CBDCs.”

Easing cross-border payments, worldwide expansion of UPI- RBI efforts

The Reserve Bank of India plans to expand the Unified Payments System (UPI) globally by integrating with other fast payment systems on a worldwide scale, or offering it as a readymade Fast Payment System (FPS) for countries. This it claims will facilitate faster payments and boost the economy, as per its Report on Currency and Finance 2023-24.

It also aims to empower CBDC as it reduces the dependence on cash and facilitates easy cross-border payments while reinforcing the role of the Central Bank.

The report noted that in October 2020, the G20 endorsed a roadmap to enhance international cross-border payments and stipulated its targets for the same by 2027. Apart from UPI and CBDC, also aims to foster and promote indigenous innovations such as DPI globally, to invite foreign investors and buyers.

Internationalizing UPI and Fast Payment systems

The RBI said, “The future of cross-border payments will be characterised by the setting up of dedicated payment rails for instantaneous transfers and greater harmonisation of payment regulations across borders.”

UPI has continued to observe exponential growth. Transactions have increased from 5.39 billion in 2018-19 to 131.13 billion in 2023-24 and their value has increased from Rs. 8.8 lakh crore to Rs. 200 lakh crore during the same period. Currently, UPI is processing close to 450 million transactions in a day, and in June 2024 recorded nearly 14 billion transactions a month, with 424 million unique users. Eighty percent of all digital payment volumes and 79.6% of retail payments in 2023-24 were made through UPI. Notably, the National Payments Corporation of India (NPCI) capped the market share of a provider to 30% by December 2024 to address concentration risks after it noted that certain players have cornered the UPI market in India.

 

The RBI aims to integrate the fast payment systems (FPS) of foreign countries with UPI. It aims to facilitate trade and commerce, reduce remittance costs and time, lower cash usage expenses, boost the share of digital payments in GDP and improve transaction transparency.

The report stated that remittances to India are estimated to increase to around US$ 160 billion in 2029 from US$ 115 billion in 2023 due to India’s growing emigrating population. Thus, a cross-border payment system can improve the speed and transparency of transactions, reduce liquidity costs and fees and benefit India’s economy. The RBI also sees the increase in remittances as an opportunity for Fintechs to provide cheaper solutions in cross-border payments

 

The Central Bank believes that FPSs interoperability have the potential to make cross-border payments cheaper and faster, while increasing transparency. Central Bank recommended interlinking of FPSs for cross-border payments. It cited UPI-PayNow, in Singapore as an example of a bilateral model that  leverages open banking APIs to allow account holders conduct cross-border remittance transactions through their individual FPS apps with the same ease as domestic transactions.

The RBI called for international collaboration, harmonisation and promotion of common protocols, cybersecurity standards, standardised APIs and secure communication channels, to promote cross-border payment systems.

 

India can provide technical assistance to standardise processes and protocols across countries to make them compatible with the UPI. Further, it suggested that UPI could be pitched as a product to countries exploring readymade FPS to adopt. The NIPL (NPCI International Payments Limited) has previously partnered with countries like Peru  and Namibia to introduce a UPI-like payment system in the country.

The RBI observed that Central banks globally are exploring both retail and wholesale cross-border CBDC arrangements. It has highlighted developing cross-border CBDCs and interlinking individual domestic CBDC systems. Ongoing projects endorse both bilateral transactions and multilateral arrangements and shared technical interface, the RBI noted. It also suggests taking into account the member central banks during the development stage itself to reduce reliance on coordinated policy moves in later stages. It said a more nuanced approach involves establishing a single multiple-CBDC system across jurisdictions.

Sharing India’s DPI worldwide

 

The RBI also views India’s progress in its Digital Public Infrastructure (DPI) as an opportunity for India to position itself globally. India’s digital public health infrastructure and user base can be leveraged for cross-border telemedicine, remote patient monitoring, and medical diagnostic research, it suggested. The report cited India’s CoWIN vaccination platform and National Health Portal, a consolidated repository of health information. as example of such platforms. It stated that Natural Language Processing (NLP), sensors, genetic analysis, and AI, IoT devices and robotics can provide home-based care and  create a patient-centric healthcare system.

 

The report suggested that India carve a niche in specialised digital solutions for the increasing population of senior citizens worldwide through manufacturing robots, customised hardware such as mobiles, tablets, wearables, and security devices, as well as digitally delivered services such as telemedicine, counselling, and financial advice.

 

It also aims to pitch DPI to prospective investors, governments and contractors for infrastructure and industrial projects. It said that DPI can leverage computerised land records and digitised maps created under the Digital India Land Records Modernization Programme, electronic government clearances, developments in Geographic Information System (GIS), drones and IoT to enable real time, detailed and accurate monitoring of infrastructure and industrial projects. This it said will not only attract foreign investment, but also can  be exported to other countries for their infrastructure needs.

 

India needs to strengthen its Satellite Network to diversify risk as well as connect remote geographies. Further, it has called to Strengthen India’s Sea Cable Network to ensure reliable high-speed connectivity between strategic locations. It also warned of cybersecurity risks and recommended trade agreements to combat this. These trade agreements can include commitments to building public and private sector real-time information sharing mechanisms to promote awareness, plan responses, and help targets adapt and respond, the report suggested. They can also help popularise the use of uniform international cybersecurity standards.

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