The Russian invasion of Ukraine has resulted in European countries quickly knocking off Russian banks from the international payment network SWIFT. Effectively severing the banking connection between Russia and the rest of the world, including India. This decision shows the control Europeans have over international trade transactions and why there is a need to build a parallel system, at least for the developing countries.
Exclusion of Russia from the SWIFT will lead to missed payments and disruption of global commodities market, especially in oil and gas. As the supply chain and missed payments in the commodity market overflow into adjacent markets like equities and bonds, the shock of this disruption will add to the volatility and price shocks across global markets. European countries have in one shot disrupted global payment systems and global markets. The echo of this disruption will reverberate for a long time.
There is a need for CBDC-based global payment interface (GPI) and India needs to pioneer it. India’s Central Bank Digital Currency is a mouthful and CBDC sounds like a non-functioning government acronym, so let’s call it “e-Rupee” — a simple name that clearly defines its form and linkage to India’s fiat currency, the Rupee. While the world of decentralised finance awaits our e-Rupee with cynicism and wants it to fail, there is a genuine opportunity for India to capture global leadership with e-Rupee. Especially, if the whole stack of the digital rupee is seen as a global digital public good.
The advantage of e-Rupee in global transactions is that it will increase the speed, volume and frequency of transactions, which will, in turn, reduce the cost of forex transactions. The competitiveness of Indian exporters will, as a result, improve manifold, especially commodity exporters who work on large volumes and thin margins. To make this happen, a crucial relationship must be established between the RBI and central banks of other countries that also have digital currency.
The cost of remittance with the G-20 countries is not a small amount; it can go up to as high as 10 per cent for, say, South Africa, and generally is around 6.40 per cent from G-20 countries. This is a high cost for something that can be digitally more fungible, hence CBDCs can really make remittances much cheaper, by 3-5 per cent — the high fees charged and pocketed by the commercial banking system. It may appear to be “good” for banks, but this high cost makes trade of certain commodities unviable.
It’s a different story if there is a direct link between central banks and exchange currency.
The link between central banks will enable the e-Rupee to be used for foreign transactions and become its raison d’être. This is not just a question of APIs (application programming interface) — it has to be a full stack that will recognise not just the transfer but determine the exchange rate for the transfer and allow it to happen directly from the importer’s account into the exporter’s bank account. The current tedious process of Letter of Credit and the cost of it will be bypassed, but it will still meet the requirement of logistics and the quality checks needed in each cargo. The multiple layers of foreign banks and the transaction costs that each bank levies on trade transactions will thus be greatly reduced. This will without doubt impact the $1.7-trillion global trade financing gap — not a small gap, and not a small impact for digital innovation.
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Bridging the gap or bringing the cost down will be very similar to what the superbly successful Unified Payments Interface (UPI) did for domestic internet transactions. It is now being exported to countries such as Sri Lanka for enabling their digital payment infrastructure.
UPI has the ability to scale up rapidly and has been able to keep the hackers away so far. Security and scalability will be a crucial factor for any global payment interface (GPI) to the e-Rupee. Hence, RBI should create the e-Rupee as a GPI that can be a digital public good and shared with every central bank in the world. The pilot of the e-Rupee should not just be for changing or exchanging the digital rupee into fiat currency and back, but also exchange with other central banks. India should make and offer the GPI stack as a digital public good which can be integral to its digital diplomatic effort with every country. Because it is an open source stack, countries can adapt it to fit their own CBDC and use it for global transactions.
As a diplomacy tool, GPI will help several developing countries to integrate with the global economy. This will enable their importers and exporters to trade at a cheaper transaction cost.
It will also bring about a more level-playing field on the currency front for purchasing global commodities like oil, metal ores or even agricultural products. It will help break the hegemony of a few currencies and marketplaces on global commodity prices. It will make transactions between producing and consuming countries simple, straightforward and instantaneous. It will also cut down the delay and the jump into multiple currencies and foreign banks for a transaction to be realised. This will also have an impact on the prices of global commodities and can ensure a better global exchange rate system. Instead of the exchange rate being wholly dependent on the vagaries of the speculators in the currency market.
The stack therefore will have a direct rate at which a foreign central bank is willing to buy the e-Rupee. As this is a transaction between two central banks, the rate of exchange of the CBDCs will over a period of time become the base rate for currency markets, moving the market dynamics away from speculators deciding the exchange rate based on their daily whims and fancies. These two rates will influence and coalesce and become more real.
India has to take global leadership in creating the GPI and build a parallel banking network with countries that can cut the cost of SWIFT (Society for Worldwide Interbank Financial Telecommunication) as well as check the hegemony of European powers to take unilateral decisions on which country can or cannot do trade with Russia or any other country. The hegemony of SWIFT has to end and be replaced by GPI.
K. Yatish Rajawat is CEO, Center for Innovation in Public Policy. The views expressed in this article are those of the author and do not represent the stand of this publication.
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