India and the United Arab Emirates (UAE) have signed a memorandum of understanding (MoU) to develop a proof-of-concept and pilot program for a central bank digital currency (CBDC) bridge. The collaboration will focus on CBDC interoperability to facilitate remittances and trade, which will reduce costs, increase transaction efficiency, and strengthen economic ties. The project aims to handle the significant source of remittances from the UAE to India, accounting for 17% to 18% of the total of around $87 billion as of July 2022.
CBDC for Remittances
Indian and UAE banking officials held talks in February on a rupee-dirham payment system, and that system has been under development for a year. The countries currently use U.S. dollars to settle payments. Both countries are expected to investigate a retail CBDC to handle remittances. India currently has a domestic digital rupee pilot project with 50,000 users and 5,000 participating merchants.
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India’s Reserve Bank reported in late February that it had completed around 800,000 transactions worth $134 million with its wholesale CBDCs and has been testing its CBDC’s offline functionality. Moreover, India recently integrated its non-blockchain unified payments interface (UPI) with Singapore’s PayNow system. Meanwhile, the UAE launched a nine-part financial transformation program and announced its intention to launch a CBDC for domestic and cross-border use in February. Even before that, Emirati banks had participated in the mBridge pilot project to use CBDC for cross-border transfers.
The UAE expects cryptocurrency to “play a major role for UAE trade going forward,” UAE Minister of State for Foreign Trade Thani Al-Zeyoudi said in January at the World Economic Forum. The increasing popularity of CBDCs among central banks is due to the need to modernize payment systems, ensure financial inclusion and stability, and counter the rise of private digital currencies. The UAE-India CBDC bridge project aims to accelerate CBDC adoption while fostering innovation and collaboration between the two countries’ central banks.
