Why in the News

The RBI has suggested that India propose linking BRICS countries’ Central Bank Digital Currency (CBDC) at the 2026 BRICS Summit in India. This signals a shift from limited domestic use of CBDC towards cross-border payments, especially after India’s G20 presidency in 2023 emphasised digital finance cooperation. The move contrasts with India’s successful UPI system and reflects a strategic choice rather than a technological need.

Why Is India Exploring Cross-Border CBDC Linkages?

1. Limited domestic utility: Reduces relevance of CBDC within India due to UPI’s scale and efficiency.
2. International payments focus: Repositions CBDC as a tool for cross-border settlements rather than retail payments.
3. Institutional continuity: Builds upon India’s G20 2023 agenda on crypto and digital payment standardisation.

How Does RBI’s CBDC Approach Differ from Private Cryptocurrencies?

1. Sovereign guarantee: Ensures safety and trust absent in private cryptocurrencies.
2. Non-interest bearing nature: Prevents speculative investment behaviour.
3. Blockchain utility: Retains advantages of distributed ledger technology without exposure to volatility and fraud.
4. Regulatory clarity: Enables oversight absent in decentralised crypto systems.

What Problems in Cross-Border Payments Does CBDC Address?

1. Transparency deficit: Addresses opacity in international money flows.
2. Black and laundered money: Creates immutable transaction records.
3. Traceability: Enables coding of origin and destination points.
4. Institutional linkage: Allows integration with national identity systems or tax authorities.

Why Is BRICS a Strategic Platform for CBDC Payments?

1. Shared constraints: Includes countries facing restricted access to SWIFT.
2. Payments to sanctioned states: Facilitates transactions with Russia and Iran.
3. Infrastructure autonomy: Reduces dependence on dollar-centric payment systems.
4. Mandated compliance: Enables collective rules on identification and reporting.

What Are the Geopolitical Risks?

1. Dollar displacement: Triggers strategic concern from the United States.
2. Tariff retaliation: Faces threat of additional tariffs from the U.S.
3. Political signalling: Risks being perceived as a challenge to dollar dominance.
4. Cost-benefit dilemma: Requires evaluation of marginal tariff impact given existing high tariffs.

What Makes Blockchain Suitable for Cross-Border CBDCs?

1. Immutable records: Prevents tampering with transaction history.
2. Programmability: Enables conditional compliance requirements
3. Auditability: Facilitates regulatory monitoring across jurisdictions.
4. Efficiency: Reduces friction in settlement mechanisms.

Challenges Associated with CBDCs

1. Interoperability: Requires harmonisation of legal and technical standards.
2. Cybersecurity: Increases exposure to systemic digital risks.
3. Data governance: Raises concerns over cross-border data sharing.
4. Geopolitical pushback: Triggers resistance from dollar-centric systems.

Conclusion:

India’s push for cross-border CBDC linkages reflects a pragmatic recalibration of its digital finance strategy. With domestic payments efficiently handled by UPI, CBDCs are being repositioned to address gaps in cross-border settlements, transparency, and geopolitical resilience. The success of this approach will depend on interoperability, data governance, and careful management of geopolitical risks while preserving monetary sovereignty.

PYQ Relevance

[UPSC 2023] What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements.

Linkage: The question tests India’s progress in building a digital economy, with emphasis on digital payments. The article shows how UPI’s success limits domestic CBDC use, pushing India to focus on cross-border digital payments instead.

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