CBDCs are being researched or implemented by Asian governments at a rapid pace. What does this imply for the region’s reliance on the US dollar?
The rapid rise in mainstream interest in cryptocurrencies has compelled a number of governments to develop their own digital alternatives. Various jurisdictions have expressed interest in central bank digital currencies (CBDCs), which are digital versions of government-issued fiat.
CBDCs continue to gain attention from governments around the world due to their ability to use blockchain technology to facilitate simplified fiscal policy, as well as calibrate privacy features and even provide cross-border banking services to the unbanked.
More than 80% of central banks are already researching CBDCs, with some working on proofs of concept that could eventually lead to the introduction of fully functional CBDCs, according to surveys. Ten percent of the central banks polled intend to offer a retail version of a CBDC within the next three years, with another twenty percent planning to do so within the next six years.
In Asia, these efforts have been aided by China’s release of the world’s first CBDC, following the formation of a task force as early as 2014. By 2016, the People’s Bank of China (PBoC) had established a Digital Currency Institute, which had created a CBDC prototype.
According to reports, Thailand’s, Hong Kong’s, and China’s central banks are working together to develop a digital ledger technology (DLT) for a CBDC prototype designed to bridge cross-border gaps.
In this article, we will take a quick look at some CBDC projects that are currently in the works on the Asian continent.
With the release of the digital yuan — a CBDC project issued by the PBoC — China has joined the ranks of the world’s leading economies in embracing digital currencies.
Known as the Digital Currency Electronic Payment, it is a type of electronic payment that uses digital currency (DCEP) China’s digital yuan (e-CNY) is expected to completely replace cash payments and has been available in major cities since April 2020.
While China’s DCEP provides some anonymity, it is controlled, tracked, and registered on smartphone apps by the Chinese government, allowing them to freeze accounts at any time.
One of its advantages is that users on China’s DCEP network can reverse or correct erroneous transactions, which is a feature lacking in decentralized digital currencies such as Bitcoin (BTC).
As China’s CBDC takes shape, various countries (particularly the United States) have expressed concern that the new CBDC initiative will assist China in tightening increased surveillance on its citizens and private companies.
The move is also seen as an attempt to supplant the US dollar’s dominance in international trade. Nonetheless, China’s e-CNY remains highly localized, with the Asian nation making no significant efforts to take its CBDC global.
The Hong Kong Monetary Authority (HKMA) recently published a white paper outlining plans to test the benefits of retail CBDCs in the city’s cross-border markets.
Hong Kong is now governed under a one-country, two-system framework, with its own financial and judicial systems distinct from those of mainland China. HKMA, on the other hand, is collaborating with China’s central bank to investigate the infrastructure development of its digital Hong Kong dollar (e-HKD).
“The architecture proposed in Hong Kong’s e-HKD features a flexible and efficient two-tier distribution model of a CBDC that enabled privacy-preserving transactions, traceability, and cross-border ledger synchronizations,” according to the white paper.
The white paper is the result of CBDC research conducted by Hong Kong’s major financial authority since 2017 under the aegis of “Project LionRock.” The HKMA considered academic and industry experts’ opinions and intends to conduct additional trials to ensure the readiness of both a retail and wholesale CBDC.
The Bank of Korea (BoK) has made a call for a technology partner to help pilot a CBDC program that will run until the end of the year in South Korea.
In a report released in February of this year, the Bank of Korea announced plans to test and distribute a digital won while outlining the legal challenges that come with a state-issued digital currency.
Apart from selecting a technology partner to assist with the project, BoK has also announced that its CBDC will first operate in a limited test environment to analyze the CBDC’s functionality and security.
According to previous remarks by a BoK official, cash transactions in South Korea are declining, and the central bank is only preparing “for the expected changes in payment settlement systems [globally].”
In the summer of 2020, the central bank formed a committee task force to study the possibility of establishing a CBDC.
In a virtual briefing, the Bangko Sentral ng Pilipinas confirmed the formation of a committee to investigate CBDCs. Governor Benjamin Diokno stated in the briefing that a feasibility test and an evaluation of the policy mechanisms for issuing a CBDC were currently underway.
The Philippine government, like most governments and traditional financial institutions, did not hesitate to acknowledge the importance of blockchain technology. “Cryptocurrency has always been more than the asset itself for us,” Diokno said, “but more on the blockchain technology that underpins it.”
In response to these remarks, the Philippine Bureau of the Treasury, in collaboration with the Philippines’ Digital Asset Exchange and UnionBank, launched a blockchain-powered mobile application for distributing government-issued treasury bonds.
However, a few months later, the Philippines’ central bank rejected the possibility of issuing a CBDC anytime soon. The country’s central bank noted that its CBDC research so far could benefit from looking at established use cases of digital currencies in the private sector as well as other industrial applications, citing the need for ongoing research and study.
The Monetary Authority of Singapore has been looking into CBDC initiatives since 2016 and is now looking for commercial partners to help develop the currency.
Singapore was able to establish a healthy diversity of solutions with the participation of more than 300 individuals by establishing challenges and competitions to discover and develop a retail CBDC.
Singapore’s move to establish a CBDC began as a collaborative project with an institute known as “Project Dunbar,” which was primarily focused on developing an in-house retail CBDC for the country.
Soon after, Singapore’s central bank announced cash prizes for participants who proposed digital currency concepts. ANZ Banking Group, Standard Chartered Bank, Criteo, Soramitsu, and HSB Bank Limited were among the challenge’s finalists.
Throughout 2021, Singaporean authorities have maintained a crypto-friendly stance, with crypto exchange platforms granted permission to operate in a manner similar to other digital payment token services.
“Project Bakong” in Cambodia is likely one of the few fully operational retail CBDCs in the world. The country’s blockchain-enabled money transfer project was originally scheduled to begin in October 2020.
The project was reported to have over 200,000 users by June 2021, with an overall indirect reach of over five million users. Furthermore, Cambodia’s CBDC project achieved a transactional throughput of 1.4 million transactions valued at $500 million in the first half of 2021.
The Cambodian CBDC, built on a hyper ledger platform, includes mobile connectivity that allows users to connect to financial institutions and make payments without the use of a centralized clearing entity.
Aside from the stated goal of using the CBDC to reduce reliance on the US dollar, officials revealed that plans are in the works to investigate cross-border transaction capability through a partnership with Thailand’s central bank and Malaysia’s largest bank.
In Japan, the country’s central bank collaborated with a group of seven other central banks in October 2020 to publish a report on CBDCs.
Since then, the Bank of Japan (BoJ) has started a proof-of-concept test to put the core CBDC functions to the test. While the testing phase was supposed to end in March of this year, officials from Japan’s digital currency panel have stated that the digital yen should be compatible with other CBDCs and that the Bank of Japan is still ironing out its key functions.
One of Japan’s primary considerations in developing a digital currency that is resilient to disruption is the CBDC’s offline capability, given Japan’s vulnerability to natural disasters such as earthquakes, floods, and tsunamis.
Japan’s parliamentary vice-minister for foreign affairs stated at the start of 2020 that Japan’s digital currency could be a joint venture with public and private partners to align Japan’s goal with global changes in fintech.
Thailand has collaborated with Hong Kong’s HKMA since 2019 to test the use of a CBDC in cross-border payments between financial institutions in both countries.
“The development of a CBDC is a key milestone with the potential to alter the financial infrastructure and ultimately the financial landscape, which could cause many changes in the roles of many stakeholders,” according to a press release from the Bank of Thailand.
The Bank of Thailand, like other CBDC initiatives, will seek consultations and feedback from the general public, as well as the private and public sectors, on the “development and issuance of retail CBDC.”
In the second quarter of 2022, the Bank of Thailand intends to begin pilot tests for the use of its CBDC.
The Vietnamese government had previously requested that the State Bank of Vietnam investigate blockchain-based currencies. Despite its previous harsh stance on cryptocurrencies, Vietnam appears to have joined the growing list of jurisdictions looking into CBDCs.
Even as the country experienced high levels of growth in digital currencies, the country’s ministry of finance announced plans in May 2020 to research and formulate a regulatory law for the crypto industry.
Given the utility of CBDCs for a small country in a global financial system dominated by the US dollar, the Vietnamese government decided to investigate them in July, with plans to issue a pilot CBDC.