RBI's Flight in Cross-Border Payments

The economy of India has changed significantly during the previous nine decades. Over this period, the nation's economic growth and progress have been made possible by the RBI's dedication to preserving monetary and financial stability. Institutions must be flexible in the face of fast change if they are to continue being relevant and successful across many decades. The RBI and other central banks across the globe have demonstrated time and time again that they are able and willing to modify their methods and operations in response to shifting financial and economic conditions.

Even the most basic function of central banking, the distribution of money, must adapt to the changing circumstances. The singleness of money and the finality of payments are guaranteed by central bank money, which serves as the reliable foundation of the whole financial system. People and companies will naturally demand that the money they use arrives in a form and with characteristics that satisfy their evolving demands as society and the economy grow. People and companies will go elsewhere for money and payment services if central banks and reliable financial institutions are unable to provide these needs. It is critical that central banks comprehend these shifting needs, plan ahead for them, and, in the end, distribute money in a way that is appropriate for society. The RBI has set the standard in this area with its incredibly effective CDBC pilot programs for retail and wholesale.

Given this, it is evident that the efforts towards ‘Digital public infrastructure and New technologies’ are essential to the goals of the Bank for International Settlements and the Reserve Bank of India. India is leading the way in the creation of digital public infrastructure, and other policymakers may learn a lot from its experiences.

Significant improvements in financial inclusion and payment efficiency have been made possible by the quick implementation of infrastructure like Aadhar and the Unified Payments Interface (UPI). It has demonstrated how public authorities may bring about revolutionary change and unleash the full creative potential of the private sector for the good of all by thinking large, moving quickly, and embracing cutting-edge technology. Particular attention should be paid to the final component the private sector's engagement. It is essential to the two-tier monetary structure that exists now and will continue to be so as the financial and monetary systems develop in India and throughout the world in the future.

When considering how public authorities can support the safe and effective implementation of new financial market infrastructures, including cutting-edge technologies like tokenization and artificial intelligence (AI), in the framework of a more secure and efficient financial system, we should keep India's experience in mind. These teachings apply to more than just one jurisdiction. They are pertinent while considering ways to improve the international financial system. This leads us to think about increasing cross-border payment efficiency, which is an important subject. It has long been acknowledged that a greater requirement for cross-border money transfers among individuals and enterprises results from the growing interconnectedness of the world's financial systems and economies. Better cross-border payment systems would simultaneously encourage international economic cooperation. Payments made across borders usually follow domestic payments in terms of cost, speed, accessibility, and openness. This is somewhat anticipated given that the transactions are inherently more complicated and can include several parties, time zones, countries, and regulations.

Still, there are more issues with foreign payment systems than just these inevitable technological snags. Furthermore, the availability and cost of foreign payments have declined over time in some countries, partly as a result of the well-documented decline in correspondent banking connections. This is significant because many workers who live and work abroad still rely heavily on correspondent banking to transfer money home. The G20 released its Roadmap for Improving Cross-Border Payments in 2020, in part, to address these deficiencies. The BIS has actively contributed to implementing the strategy through its Committee on Payments and Market Infrastructures and Innovation Hub.

Although a lot of attention and resources have been put toward this goal, more work still needs to be done. The good news is that there is technology available to provide a cross-border payment system that is far better. And this is increasingly being matched by the necessary collaboration and desire to achieve this. Observing two domains where significant practical innovation is occurring; where in both cases, state bodies such as central banks are acting as catalysts. They are establishing the guidelines, supplying essential infrastructure, and effectively collaborating with the business sector to create a more improved system that benefits all users. Additionally, they are making sure that the safeguards put in place to protect the integrity of the financial system such as adherence to international sanctions, anti-money laundering laws, and know-your-customer protocols are maintained, although more rigorously and at a lower cost than they are in the current system.

The first thing to consider is the cross-border connection of quick payment systems, such as India's UPI system. These systems make use of the current infrastructure to enable cross-border payments that are comparable in nature and offer immediate, high-volume, low-value payments. Interlinking these systems might theoretically enable cross-border payments to flow in 60 seconds or less, which would be a significant improvement over current methods given that the majority of instant payment systems (IPS) handle domestic payments in 30 seconds or less.

Numerous nations have previously established bilateral links between their quick payment systems. There is a connection between the PayNow system in Singapore and the UPI system in India. These two-way channels are a useful place to start. However, we ought to aspire higher. Scaling bilateral relationships is challenging. Every bilateral connection necessitates a fresh negotiation and harmonization of technology and regulatory practices because each IPS has distinct technical standards, business procedures, and regulatory needs. The number of bilateral linkages required to complete the network grows exponentially with the number of participating states. In order to achieve global advancement, a multilateral strategy is needed.

Project Nexus, a collaboration between six central banks, payment system providers, and the Singapore Center of the BIS Innovation Hub, aims to do this. The platform is expected to be operational by 2026. The goal is to reduce the high costs of cross-border transactions by reducing dependency on a few dominant entities.?

A common architecture for domestic instant payment systems to communicate with one another is provided by the multilateral Nexus program. To establish a connection with every other member of the network, all they have to do is establish one.

It is exciting to learn that the central banks and instant payment system operators of Malaysia, the Philippines, Singapore, and Thailand, as well as the RBI, have all committed to participating fully in stage 4 of the project. During this stage of the project, the IPS and the participating central banks will now get assistance from the BIS to prepare Nexus for live deployment. Upon activation, Nexus will provide instantaneous cross-currency transactions for over 1.5 billion users. Additionally, it would open the door for future membership in this multilateral network by additional interested governments.

Now, considering a second innovative strategy for enhancing cross-border payments, which is using modern technologies to increase the efficiency of the correspondent banking system. One significant development in this area is the use of tokenized commercial bank deposits. They provide three main advantages. Firstly, they make it possible for financial integrity measures to be pre-programmed, which significantly reduces the cost of cross-border payment services for financial institutions. Secondly, they can facilitate quicker, less hazardous, and more secure payments by streamlining clearing and settlement when combined into a single ledger. Thirdly, they can enable completely new, more adaptable contingent payments using smart contracts.

When paired with tokenized wholesale central bank money to be utilized as a settlement asset, the advantages of tokenized commercial bank deposits as a tool for cross-border payments may be even larger. Additionally, since high-value wholesale payments are impractical to send through IPS, this strategy could make them possible. In collaboration with seven central banks, the BIS Innovation Hub has introduced Project Agorá. This initiative will look into the viability and applications of the fundamental framework that the BIS has outlined in collaboration with a sizable consortium of private financial businesses that the Institute for International Finance has called together.

The two methods outlined here enhancing cross-border payment systems are valuable in and of themselves. They also contribute to a more comprehensive idea of the future functionality of the financial system. To express this vision, recently the the idea of the Finternet was introduced by Nandan Nilekani, co-founder and the non-executive chairman of Infosys and Agustín Carstens, General Manager of the BIS. The joint vision is to develop a system in which smart economic architecture, combined with cutting-edge technology applied within a strong regulatory and governance framework, will allow people and companies to send any kind of financial asset, to anybody, anywhere in the world, at any time, in any amount, using any kind of device.

The RBI has issued new rules to regulate entities that facilitate cross-border payments, including Authorized Dealer (AD) banks, Payment Aggregators (PAs), and PAs-CB.

The sector must adopt cutting-edge technology in an integrated manner to realize that goal, including tokenized assets, unified ledgers, and quick payment systems. The goal is to solve the main problems and inefficiencies in the present system, not to exploit technology for its own sake. This would enable quicker, safer, and more affordable transactions, giving financial service consumers more options and better services, and promoting financial inclusion.

Enhancing international payments will undoubtedly alleviate a major issue inside the current financial system. Furthermore, strengthening the correspondent banking system with the use of tokenized deposits and wholesale central bank money, as well as connecting quick payment systems, would contribute to the technical improvement and overall financial system integration.