Chennai: India can effectively use a Central Bank Digital Currency as an avenue for cross-border payments in view of high volume of inbound remittance, said the International Mone-tary Fund (IMF), adding that international cooperation would be a key factor for its success.
India’s payment providers already have the Unified Payments Inter-face (UPI), which has most of the attributes of a retail CBDC, and even some additional features. Almost 80 per cent of retail transactions in India now take place via the UPI platform.
The success of UPI and private providers may lead to a lower-than-expected demand for a retail CBDC, unless the latter has some evident advantage. A CBDC, however, could prove to be beneficial by providing a public sector alternative that could enhance market competition and lower costs.
“International payments suffer from inefficiencies that make transactions slower, costlier, less transparent, and less accessible when compared with domestic payments. In this respect, India faces similar challenges as other countries, although perhaps of a larger magnitude given the high volume of remittances. A CBDC could be used in this respect as an avenue for cross-border payments.
The RBI could opt for introducing both a retail and wholesale CBDC, addressing inefficiencies for both retail and wholesale transactions,” the IMF said.
International cooperation, however, would be a key factor for success, as it would ensure the highest degree of compatibility between national CBDCs.
While continuing to contribute to international efforts to develop a cross-border CBDC, the IMF said India could try to spearhead the process, for instance by establishing bilateral agreements with major financial partners in the region.
The adoption of a CBDC necessarily involves risks. It is not clear to which extent the authorities can guarantee the same degree of anonymity that physical cash provides. However, full anonymity, would generally not be compatible with anti-money laundering and combating the financing of terrorism and the authorities should keep in mind financial integrity implications when designing a CBDC.
Moreover, the adoption of a CBDC involves operational costs and reputational risks. “As of now, there are no estimates for the costs to develop, establish, and maintain the infrastructures needed for a successful CBDC. A relatively low demand for the CBDC together with high implementation costs could negatively affect the central bank’s reputation,” said the IMF.
