Singapore, China, & Cambodia Lead the Pack in CBDC Developmentby Fintech News Singapore October 16, 2023
In Asia, central banks and monetary authorities are rushing to develop and deploy central bank digital currencies (CBDCs), a technology that they believe is central to their transition to a digital economy, a new report by the Asian Development Bank (ADB) says.
The report analyzes the evolution of CBDC in Asia-Pacific (APAC), it assesses their potential risks and challenges while highlighting the technology’s possible opportunities in improving cross-border payments and financial inclusion.
Key CBDC initiatives in Asia
According to the report, central banks in Asia are making significant strides in the development of CBDCs, with Cambodia, China and Singapore leading the pack.
Cambodia was an early adopter of the concept, having started piloting its blockchain-based payment system Bakong as early as 2019. The system, which was co-developed with Soramitsu and which is based on Hyperledger Iroha blockchain technology, aims to enhance financial inclusion and safety.
Bakong was eventually launched publicly in 2020, the same year that China kickstarted its own respective CBDC pilot. The electronic Chinese yuan (e-CNY), which is being rolled out across the country, is designed to support the development of retail payment infrastructures, improve payment system efficiency, and foster developments in the digital economy.
China’s e-CNY project is currently one of the most successful CBDC pilots in the world, having reached a volume of CNY 1.8 trillion (US$249.33 billion) worth of transactions in June 2023 and recording a total of 120 million opened wallets, central bank governor Yi Gang said July 2023.
In Thailand, authorities unveiled plans last year to launch a pilot program involving a retail CBDC. The Bank of Thailand (BOT) said at the time that the first of two tracks of the study would assess “the system’s efficiency and safety” by “conducting cash-like activities, such as paying for goods and services, within limited areas and scale of approximately 10,000 retail users selected by the bank”.
South Korea, which has been working on a CBDC project since at least 2020, wrapped up the first phase of its digital currency simulation project last year. The central bank is now gearing up to launch its CBDC to the public, a pilot project that’s timed for next year, news outlet It.chosun reported in July 2023.
The ADB report notes that one of the key distinctions of CBDC projects taking place in APAC is their emphasis on interoperability, especially concerning cross-border transactions.
For example, Project Inthanon-LionRock, a collaboration between Hong Kong and Thailand, and supported by the Bank for International Settlements (BIS) Innovation Hub, was launched in 2019 to study the application of CBDC to cross-border payments.
The initiative, which has since expanded to include the participation of China and the United Arab Emirates (UAE), culminated with the development of mBridge, a platform based on distributed ledger technology (DLT) upon which multiple central banks can issue and exchange their respective CBDCs to conduct cross-border transactions.
Potential for improved financial inclusion
In addition to interoperability, another key opportunity being looked at by Asian central banks is the potential of CBDCs to improve financial inclusion.
The ADB highlights the case of Cambodia, which has developed an innovative two-tier system that offers individuals two different options: the first option is a token claim via direct wallet usage; and the second option is an account claim via a two-tier know-your-customer (KYC) system. The latter method allows excluded users to leverage an intermediary payment hub mechanism, the report says.
It also notes that while emerging countries in APAC predominantly focus on retail-oriented CBDCs to improve payments and financial access, more developed economies such as Singapore are more inclined towards wholesale CBDCs.
These economies’ key motivation for a wholesale CBDC is to explore improved efficiency of payment versus payment, and delivery versus payment of cross-border payments, reduced settlement risks by settling directly with central bank liabilities, 24/7 availability, widened interoperability with other settlement systems, and reduced turnaround time, the report says.
The Monetary Authority of Singapore (MAS) started its exploration of wholesale CBDCs in 2016 with the launch of Project Ubin. The initiative, which focuses on experimenting blockchain technology for payments and settlements, entered its sixth phase in November 2022. Ubin+ aims to advance cross-border connectivity with wholesale CBDCs through collaborations with international partners.
Despite the potential benefits and opportunities brought about CBDCs, the ADB report notes that the technology also introduces a number of risks. For one, CBDCs could amplify bank runs during financial crises by enabling quicker withdrawals without geographic or time constraints, it says.
CBDCs also come significant technical, security and infrastructure risks. CBDCs could be prone to technology failures, like power outages or hacking attempts, the report says. While they prevent transaction tampering, personal information might remain vulnerable.
Hence, effective CBDC circulation depends on robust digital infrastructure, it warns. This infrastructure should not only be designed with security in mind, but also accessibility. Many people in emerging markets are located in rural areas with limited Internet access or digital literacy. These people might find it difficult to use and adopt a CBDC, the report says.
Another risk outlined in the ADB report relates to financial disintermediation. Interest-bearing CBDCs might reduce reliance on traditional bank deposits, causing banks to shift to wholesale funding, the report says. This could expose inefficiencies in traditional financial institutions, especially when compared to nimble fintech companies.
Finally, rapid development in CBDC-based financial products can make it hard for regulators to monitor, especially now that governments are working on CBDC linkage. This calls for governments to come together to establish international regulatory coordination, promote regulatory consensus, and put in place unified regulation standards.
CBDCs are gaining traction globally. A survey conducted by the BIS in late-2022 revealed that 93% of the 86 central banks polled were engaged in some form of CBDC work. In Asia, 35 countries are said to be in different stages of CBDC development, American think tank Atlantic Council estimates.
By 2030, 15 retail and nine wholesale CBDCs could be publicly circulating, the BIS survey suggests.
Featured image credit: edited from freepik