India and UAE Collaborate on Innovative Financial Solutions with CBDC Initiative

Collaboration on Financial Services

On March 15, 2023, the Reserve Bank of India (RBI) and the Central Bank of the United Arab Emirates (UAE) joined forces by signing a memorandum of understanding (MoU) aimed at innovation in financial services. This is not just another official handshake but a commitment to improve cross-border transactions through the advent of central bank digital currencies (CBDCs).

Forging a CBDC Bridge

The two parties have set their sights on developing a proof-of-concept for a CBDC bridge, which is expected to streamline remittances and trade. Think of it as building a sturdy bridge over the choppy waters of financial transactions—reducing costs and boosting efficiency along the way! Not to mention, it will bolster economic ties between these two nations.

Past Efforts and Future Prospects

Before this MoU, discussions were underway about a rupee-dirham payment system using correspondent banks, a concept that has been simmering for about a year. Currently, transactions are pinned down by the dominion of the U.S. dollar. So, moving to a direct system would be akin to hitting two birds with one stone—less dependence on the dollar and more autonomy in trade.

The Influence of Remittances

It’s worth noting that while remittances from the Gulf have plummeted by 50% compared to 2016-2017, the UAE still stands out as a major source of financial inflow to India, contributing 17% to 18% of the total remittance pie, which was around $87 billion as of July 2022. Post-COVID, the UAE lost its top spot to the U.S. for Indian remittances, but it’s still a heavyweight contender.

Looking Ahead: Retail CBDCs and Blockchain Integration

As both countries gear up to potentially launch retail CBDCs, India is already running a pilot project for its digital rupee, with a rapidly expanding user base. The RBI recently reported impressive milestones, completing around 800,000 transactions valued at $134 million through its wholesale CBDC. Meanwhile, the UAE is hopping on the CBDC bandwagon as well, aiming for domestic and cross-border applications.

In a world where cryptocurrency is becoming increasingly influential, both countries are embracing the challenge head-on, with hopeful eyes on future trade possibilities. In the words of UAE Minister of State for Foreign Trade Thani Al-Zeyoudi, cryptocurrency is expected to play a “major role for UAE trade going forward.” Talk about riding the digital wave!