Case study: Remittances from Europe to India with cross-border CBDC

In their 2023 report on CBDC interoperability, the World Economic Forum writes that “the central bank community should take steps at the beginning of the [CBDC] design process to include” considerations on interoperable functionalities. The authors have identified various principles for that, such as standardization, openness, and cross-border integration.

In the same vein, many other institutions have also highlighted the need for interoperability. Most recently, the Atlantic Council has published a survey of ongoing efforts in that area, noting that “there is a patchwork of first steps undertaken by both public-and private-sector entities, aimed at achieving different objectives”.

In previous articles, I have already discussed the theoretical aspects of the “what” and “how”. Now, let's shift gears and look at some case studies. The first one is a cross-border remittance from Europe to India.

Series overview.

1. CBDC should be interoperable. But with what?
2. CBDC should be interoperable. But how?
3. Case study: Remittances from Europe to India with cross-border CBDC (this part)

Overview

This proof of concept has been implemented in a joint project by Giesecke+Devrient and the UDPN Alliance. The solution connects two products: the Universal Digital Payments Network (UDPN) platform as the multilateral cross-border infrastructure and Filia? as one example of a domestic rCBDC platform.

The UDPN is a global messaging network supporting government-regulated digital currency systems, including regulated stablecoins and CBDCs. It allows any entity to transfer and swap digital currencies across borders, currencies, and systems in a low-cost and convenient manner. Technically, it comprises a DLT-based application layer where smart contracts can be deployed and called for core UDPN functions (e.g., transfer, swap) and also allows third parties to innovate and deploy their own smart contract-based value-added services for functions such as Know Your Customer checks (KYC) or foreign currency exchange (FX). Within UDPN, the DLT nodes validating transactions are operated in a decentralized governance structure by an industrial consortium of multiple entities. This enables a hub-and-spoke model where new systems and participants can be onboarded easily. UDPN relies on the open Decentralised Identifiers (DID) standard to establish relationships between entities across different systems.

Objectives

The goal of the joint project is to connect both systems and enable bidirectional, peer-to-peer payments across currencies. As a showcase, we implemented payments from hypothetical EUR (running on Filia?) to INR (running on UDPN) rCBDCs. This included transfers between end-user wallets, currency conversion, liquidity management, CBDC issuance, identity, and wallet management.

For the purpose of the prototype, it was decided to employ two different CBDC issuance models: the hypothetical Digital Euro is issued in a two-tier model on the Filia? platform, and the Digital Rupee in a synthetic model natively on UDPN. In terms of the above classification, the prototype is an exchange between two systems with different units, issuers, and platforms.

Transaction flow

The high-level transaction flow for a EUR-to-INR transaction can be described as follows:

1. In the Filia? app, the first user initiates a cross-remittance transaction to the second user with the cross-remittance transaction information: beneficiary unique identifier (such as registered e-mail ID, phone number, etc.), beneficiary bank, amount (EUR), etc. The system queries and displays the best FX rate applicable and receivable in local currency (INR) to the sender to confirm the cross-border transactions.
2. After the first user confirms the transaction, their bank initiates the EUR transfer from their EUR wallet to the FX Settlement Bank’s EUR wallet (EUR liquidity pool). The Filia? system will process the payment and return the result to the first user’s bank.
3. The first user’s bank initiates a swap request from EUR to INR by calling the “Transfer and Swap” smart contract deployed by the FX Settlement Bank on the UDPN.
4. The FX Settlement Bank confirms the status of EUR transaction result from the Filia? payment processor.
5. After confirming the transfer, the FX Settlement Bank will initiate an INR transfer and send the INR from its INR liquidity pool to the second user’s INR wallet by calling the “eINR Wallet” smart contract.
6. Once the INR transfer is complete, the transaction result will be synchronized to the participating banks and the “Transfer & Swap” contract.
7. Both users can retrieve the result of the swap transaction from their respective banking apps with transaction logs, including timestamps, FX rates, and transaction/service fees (if applicable).

Summary

Key benefits presented by this solution are lower transactions costs, faster transaction times with 24/7 availability (end-to-end in less than one minute), settlement in national currencies, improved data sharing and transparency for all participants (including end-users), and regulatory compliance. Due to the modular architecture, the prototype addresses some key hurdles in today’s cross-border transactions. Since any FX provider can connect to the system, the need for intermediary credit is eliminated. Furthermore, this reduces the dependence on intermediaries and correspondent banking, which also increases transfer speed.

This article is an excerpt from the research paper “Interoperability aspects of CBDC across ecosystems and borders”. The full version can be read here. The technical design and more background can be read in a post by UDPN.