Thursday, February 29, 2024

India holds the key to a global shift away from Swift

Over the pa​st few months, India’s central bank has tied up with its peers in Singapore and the UAE to facilitate cross-border funds transfers between individuals on the back of its Unified Payments Interface (UPI) platform.

According to a recent report in The Economic Times, the RBI is now in talks with its counterparts in the US and Hong Kong, besides the Society for Worldwide InterBank Financial Communications (Swift), the global financial messaging system, on the prospects of launching digital cross-border settlements. The goal is to make global payments faster and cheaper for both individuals and companies.

This is not just forward-looking move but a logical one, too, especially since India appears to have done the hard yards on launching a central bank digital currency or CBDC. With a robust domestic payments system in place to help people move money instantly and cheaply, the attraction of a CBDC for resident Indians is limited.

Where India’s CBDC holds considerable promise is in cross-border payments. For individuals and companies into global trade and services, moving funds across countries is not only costly but also painfully slow. To make cross-border payments, they must use the Swift platform, which relays financial messages between banks. Since both banks must approve the transfer, it isn’t completed instantly, as with UPI, or even within a short time, as with the National Electronic Fund Transfer (NEFT) system.

Over time there has been a growing feeling that Swift’s transaction costs are far too high. A CBDC could address this problem as the transaction be settled primarily between two central banks, with an intermediary bank involved only at the end of the transaction.

In the wake of economic sanctions against Russia, including the freezing of its central bank’s assets, there have been informal talks among a few countries about working on an alternative system for cross-border payments. Though there hasn’t been much headway on the matter, one option would be to enter into bilateral agreements to obviate this.

Since a CBDC opens up the possibility of eliminating an intermediary, while ensuring lower transaction costs, it could serve as the Swift alternative that countries have been looking for. The main draw, of course, is the difference it will make to the millions of people living abroad who remit funds to their families back home, and to multinational companies.

Exciting as this sounds, though, it brings with it multiple challenges. These include deciding the exchange rate for cross-border transactions, bilateral agreements between countries, and the speed at which various countries launch CBDCs. India has already launched a CBDC pilot. The volume of transactions, critical to a full-fledged launch, aren’t sizable yet. This may be partly due to the popularity of UPI.

Then there are counterparties. The US, which has also started work on a CBDC, may not be in a hurry to do so and would prefer to get the process right. The UK has also signaled that the earliest unveiling, if the project is operationally and technically feasible, would probably be in the second half of this decade.

What all this also shows is that since few countries have the equivalent of a UPI, there is a great window of opportunity to take this payment platform global. If other countries adopted India’s public digital infrastructure, large swathes of the global economy could speed up their adoption of CBDCs for cross-border transactions not involving Swift.

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