Central Bank Digital Currency (CBDC)

The RBI has advised the Government of India to promote collaboration among BRICS nations on Central Bank Digital Currency (CBDC) -based cross-border payments. Read here to learn more.

The Reserve Bank of India (RBI) has advised the Government of India to use India’s BRICS Chairmanship in 2026 to promote collaboration among BRICS nations on CBDC-based cross-border payments.

The proposal aims to reduce transaction costs, speed up settlements, and lower dependence on the US dollar-dominated financial system, while acknowledging significant short-term risks.

What are Central Bank Digital Currencies (CBDCs)?

A Central Bank Digital Currency (CBDC) is a digital form of sovereign legal tender issued and backed by a country’s central bank.

It represents the digital equivalent of physical cash, maintaining a one-to-one value with the national currency.

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Example: India’s CBDC, e-Rupee, is issued by the Reserve Bank of India (RBI)

Key Features of CBDC

• Legal Tender: Same status as paper currency
• Centralised Issuance: Issued and regulated by the central bank
• Digital Wallet-Based: Stored in CBDC wallets, not bank accounts
• Direct Value Transfer: Wallet-to-wallet transfer of money
• Programmable: Can include conditions like time, purpose, or location
• Traceable: Transactions recorded on a secure digital ledger

Types of CBDCs

1. Retail CBDC (CBDC-R)

• Used by individuals and businesses
• Alternative to cash for day-to-day payments
• India’s e₹-Retail is in pilot phase

2. Wholesale CBDC (CBDC-W)

• Used by banks and financial institutions
• Enables faster interbank settlements and securities transactions
• India’s e₹-Wholesale used for government securities settlement

CBDC vs Other Digital Money

Why are Countries Introducing CBDCs?

1. Reduce Cash Dependence

• Lower printing, storage, and logistics costs
• Improve efficiency in payments

2. Strengthen Monetary Policy

• Enables direct policy transmission
• Allows targeted stimulus using programmable money

3. Curb Black Money & Illicit Flows

• Enhanced traceability
• Helps tackle money laundering and terror financing

4. Financial Inclusion

• Enables access to digital money without a bank account
• Useful in remote and underserved areas

5. Cross-Border Payments

• Faster, cheaper international settlements
• Reduced dependence on SWIFT and the US dollar

India’s CBDC (e-Rupee)

• Launched by RBI in 2022 (pilot phase)
• Two variants:
  • e₹-R for retail users
  • e₹-W for interbank use
• Operates alongside:
  • Cash
  • UPI
  • Bank deposits
• RBI has clarified that CBDC is not meant to replace UPI, but to complement it

RBI’s Proposal on BRICS CBDC Framework

• RBI has reportedly conveyed to the Ministry of Finance the idea of using Central Bank Digital Currencies (CBDCs) of BRICS countries for cross-border trade and payments
• Envisages a common payments framework covering:
  • Founding members: Brazil, Russia, India, China, South Africa
  • New members: Egypt, Ethiopia, Iran, UAE, Indonesia (and future entrants)
• Objective:
  • Faster and cheaper cross-border settlements
  • Reduced reliance on SWIFT and the US dollar
  • Strengthening South-South financial cooperation

Why CBDCs for Cross-Border Payments?

1. Lower Cost and Faster Settlements

• Eliminates intermediaries like correspondent banks
• Reduces:
  • Transaction fees
  • Settlement delays (currently 2–5 days in many cases)

2. Greater Transparency and Traceability

• Immutable digital ledger improves:
  • Monitoring of cross-border flows
  • Detection of money laundering and terror financing

3. Programmable Money for Policy Use

• CBDCs can be programmed with:
  • Time limits (expiry)
  • Geographic or merchant restrictions
  • Embedded compliance rules
• Useful for:
  • Trade settlements
  • Targeted subsidies
  • Conditional payments

4. Curbing Illicit Financial Flows

• Cross-border payments are a major channel for:
  • Tax evasion
  • Black money
• CBDCs offer better oversight than traditional banking rails

5. Strategic and Geopolitical Benefits

• Reduces vulnerability to:
  • Sanctions
  • SWIFT exclusion (as seen in Russia and Iran)
• Supports strategic autonomy in trade settlements
• Strengthens BRICS as a counterweight to dollar dominance

Risks and Challenges

1. Regulatory and Legal Complexity

• Harmonising:
  • Financial laws
  • Capital controls
  • AML/CFT norms
• Across 10+ heterogeneous economies is extremely challenging

2. Financial Stability Concerns

• Sudden cross-border CBDC flows may:
  • Increase capital volatility
  • Weaken monetary policy transmission
• Risk of currency substitution in smaller economies

3. Cybersecurity and Data Governance

• Cross-border CBDC systems are high-value cyber targets
• Differences in:
  • Cyber resilience
  • Data localisation laws
• Could create systemic vulnerabilities

4. Uneven Digital Infrastructure

• BRICS countries differ widely in:
  • Digital public infrastructure
  • Financial inclusion
• May slow adoption and create asymmetries

5. Geopolitical Backlash

• US has previously warned against efforts to weaken the dollar
• Statements by President Donald Trump suggest:
  • Possible retaliatory tariffs or trade actions
• India risks:
  • Additional trade pressure
  • Compounding existing tariff disputes

India’s Strategic Dilemma

India must balance:

• Short-term risks:
  • Trade retaliation
  • Financial instability
  • Regulatory complexity
• Against long-term gains:
  • Reduced dollar dependence
  • Sanction-resilient trade
  • Leadership in global digital finance

India’s cautious, phased approach aligns with:

• RBI’s traditionally conservative monetary stance
• India’s preference for multipolarity without confrontation

Way Forward

• Begin with pilot corridors (e.g., India-UAE, India-Russia)
• Ensure interoperability, not a single BRICS currency
• Strengthen:
  • Cybersecurity frameworks
  • Legal harmonisation mechanisms
• Maintain parallel engagement with:
  • SWIFT
  • IMF
  • BIS Innovation Hub
• Adopt a gradualist, opt-in model for BRICS members

Conclusion

The RBI’s push for a BRICS CBDC-based cross-border payment framework reflects India’s ambition to shape the future of global finance without abrupt disruption.

While CBDCs offer efficiency, transparency, and strategic autonomy, their geopolitical and financial risks demand calibrated implementation. For India, success lies not in de-dollarisation per se, but in creating resilient, inclusive, and interoperable payment alternatives in an increasingly fragmented global financial order.

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