With the rapid adoption of digital payment methods, particularly since the onset of the pandemic, a growing number of countries worldwide are being drawn into developing their own central bank digital currencies (CBDCs).
At least 105 countries, representing over 95% of the global GDP, are exploring a CBDC, according to the Atlantic Council, a Washington, DC-based think tank. That’s a huge increase from just 35 countries in 2020.
CBDC, a digital version of the legal tender issued by a central bank, is seen as part of efforts to maintain the stability of the financial system, particularly in view of the rise of cryptocurrencies, whose value is highly volatile and whose circulation can be used for unlawful purposes. Authorities also see the vast potential of CBDC in improving financial access and inclusion, as well as in facilitating payment and settlement.
Asia is proving to be a beehive of activities in the development of CBDCs, with half of ongoing CBDC pilot projects taking place in the region.
China is leading the efforts in Asia, having released the world’s first CBDC. The People’s Bank of China (PBoC) began its exploration into the digital fiat currency as early as 2014. It began testing the digital renminbi, or e-CNY, in four cities in April 2020, and later expanded the trial to 23 cities. Since this year, WeChat Pay and Alipay, the country’s dominant payments platforms, have rolled out e-CNY on their apps as a payment option for the purchase of goods and services in the pilot cities.
The Hong Kong Monetary Authority (HKMA) is closely coordinating with the PBoC to explore the development of a digital Hong Kong dollar (e-HKD), particularly for cross-border payments to enhance the city’s position as a global hub for offshore renminbi business.
On September 20, 2022 the de-facto central bank announced that it was ramping up efforts to study the applicability of the e-HKD within the city. The HKMA plans to adopt a three-rail approach to the initiative starting in Q4 2022. Rail 1 will lay technology and legal foundations supporting the implementation of the e-HKD. Rail 2 will run concurrently with Rail 1, aiming to examine the application implementation of the e-HKD. Finally Rail 3 will examine the outcomes of the first two studies and will set a timeline for the launch of the e-HKD.
Southeast Asian countries are also considering adopting their own CBDC solutions, particularly as a means to enhance financial inclusion.
In October 2020, the National Bank of Cambodia (NBC) launched Project Bakong, an interbank payments system based on the distributed ledger technology (DLT), which has covered half of the country’s population as of January 2022, according to the Atlantic Council. NBC also started exploring cross-border wholesale transactions through Bakong in 2021, collaborating with the Bank of Thailand (BOT) and the Malaysian lender Maybank.
In Thailand, the BOT launched Project Inthanon in 2018 to test its own CBDC for domestic wholesale use. Since then, other financial bodies from different markets including Hong Kong, mainland China and the United Arab Emirates have joined the project. Now dubbed the mBridge Project, the initiative aims to streamline cross-border payments based on DLT, which is the foundation of most CBDCs.
India has also joined the CBDC race. Earlier this year, finance minister Nirmala Sitharaman said the country is planning to launch its own CDBC, the digital rupee, by 2023.
Despite the many initiatives in the development of CBDCs, some countries have taken a more cautious stance. The Monetary Authority of Singapore (MAS), for example, has already taken over five years in exploring CBDC and participating in multiple wholesale CBDC projects. Still, it believes there is no pressing need for a retail CBDC, even though it is ready for such a launch. The wide accessibility of bank-based payment systems in Singapore has stunted the demand for a retail CBDC.
Other countries, including the United States, have multiple concerns about the CBDC, especially with regard to data security and privacy. According to the US Federal Reserve, central banks and other institutions involved in the implementation of a CBDC would need to ensure information security and guard against fraud.
The pushback notwithstanding, efforts to push CBDCs into the mainstream of financial systems continue. “CBDCs will be a game-changer, providing access to alternative payment solutions for citizens and corporates, as well as reinventing financial market settlement and interbank monetary transactions,” says Benoît Sureau, partner, financial services risk and blockchain, at PwC.