Biggest Potential for CBDC will be Cross-border Money Transfer

India’s CBDC promises faster, cheaper cross-border transactions, reshaping global finance and impacting Indian industries.

Source and citation: Based on reporting by ET Bureau, October 28, 2024.

Table of Contents

TLDR For This Article:

India’s central bank governor advocates for the digital rupee’s role in streamlining cross-border payments, enabling low-cost, instantaneous transfers and potentially replacing intermediaries. However, CBDC implementation presents challenges like rapid transmission of economic shocks and capital flow volatility.

Analysis of This News for a Layman:

The concept of CBDC (Central Bank Digital Currency) refers to a digital version of national currency issued by a central bank, like India’s RBI. While many think of digital currency as a payment method like UPI (Unified Payments Interface), CBDC is different because it’s a currency, not just a system. By using CBDC, international money transfers could become nearly instant and much cheaper, especially by cutting out middlemen like banks or financial service providers.

RBI Governor Shaktikanta Das highlighted this at a global financial forum, explaining that CBDC could be designed to facilitate easy cross-border use. However, it’s not without risks: quick-moving digital money can also mean quicker economic shocks and increased currency volatility. Das assured, though, that these issues are being addressed, with systems like UPI and CBDC set to work side by side, each as a backup to the other if needed.

India’s progress on its CBDC, the digital rupee, started with its launch in 2022. The aim is to make it widely usable, with plans for wallets accessible through various payment operators.

Impact on Retail Investors:

Increased Financial Efficiency: Retail investors can expect smoother and cheaper international transactions in the future, especially beneficial for those investing abroad or transferring funds internationally.
Opportunities in Fintech Stocks: As digital currency systems grow, fintech firms, including those listed on Indian exchanges, could see increased business and stock value.
Understanding Economic Volatility: With CBDC enabling faster transactions across borders, retail investors should learn about the potential risks of quicker market responses to global economic changes.

Impact on Industries:

Banking and Financial Services: Traditional banks that rely on international transfer fees may see reduced income from cross-border transactions, though opportunities could arise from collaborating with CBDC-based systems.
Fintech and Payment Services: Companies like Paytm and Razorpay may benefit if CBDC adoption drives demand for tech integration, allowing them to serve as CBDC wallet providers or develop interoperability solutions.
International Trade and Export Businesses: Exporters could benefit from lower transaction fees, making it cheaper and faster to receive international payments, potentially boosting their margins.

Long Term Benefits & Negatives:

Benefits:

Cost Savings: By reducing reliance on intermediaries, CBDC can make cross-border transactions cheaper, enhancing profitability for companies with substantial international dealings.
Boost to Global Trade: Faster payments can stimulate trade efficiency, especially for smaller businesses looking to expand internationally.
Enhanced Transparency: CBDC’s digital nature allows for greater traceability, which could reduce fraud and enhance compliance in cross-border transactions.

Negatives:

Economic Shock Transmission: The speed of CBDC transactions could mean that financial crises in one country impact others more quickly, raising risks for economies with high foreign exposure.
Capital Flow Instability: Rapid and unrestricted flows of capital due to digital currency ease could lead to volatile currency valuations, affecting industries dependent on stable exchange rates.

Short Term Benefits & Negatives:

Benefits:

Immediate Cost Reductions: Early adopters of CBDC for cross-border payments could see immediate cost reductions, which may benefit companies with high transaction volumes.
Enhanced Financial Inclusion: Easier access to CBDC-based cross-border transfers could encourage smaller businesses to engage in international trade, broadening market participation.

Negatives:

Initial Implementation Costs: For industries adopting CBDC, initial tech integration and compliance with new regulations could require significant investment, potentially impacting profitability in the short term.
Uncertainties in Market Response: As this technology is relatively new, it may take time for market participants and investors to adjust, leading to temporary hesitancy and potential stock volatility.

Impact of CBDC on Indian Companies

Indian Companies that Might Gain:

Technology Companies:
- Infosys, TCS, Wipro: These companies could benefit from the increased demand for technology solutions related to CBDC, such as blockchain, cybersecurity, and data analytics.
- Fintech Companies: Companies like Paytm, PhonePe, and Razorpay could leverage CBDC to enhance their payment solutions and expand their user base.
Banking and Financial Services Companies:
- State Bank of India, HDFC Bank, ICICI Bank: These banks could benefit from the increased efficiency and reduced costs associated with CBDC.
- Payment Processors: Companies like NPCI could benefit from the increased volume of digital transactions facilitated by CBDC.

Indian Companies that Might Lose:

Remittance Companies:
- MoneyGram, Western Union: These companies could face increased competition from CBDC, which could reduce their market share and profitability.

Global Companies that Might Gain:

Technology Companies:
- Microsoft, Amazon, Google: These companies could benefit from the increased demand for cloud computing and AI solutions to support CBDC infrastructure.
- Blockchain Companies: Companies like Ripple and Chain could benefit from the increased adoption of blockchain technology for CBDC.
Payment Processors:
- Visa, Mastercard: These companies could benefit from the increased volume of digital transactions facilitated by CBDC, although they may face competition from new players.

Global Companies that Might Lose:

Traditional Remittance Companies:
- MoneyGram, Western Union: These companies could face increased competition from CBDC, which could reduce their market share and profitability.

Overall, the impact of CBDC on the Indian economy and its companies is likely to be positive. While some traditional players may face challenges, the overall trend is towards increased digitalization and innovation. Companies that are able to adapt to the new technological landscape and leverage the benefits of CBDC are likely to thrive.