Asian CBDCs: in search of added value

Central bank digital currencies need added value to gain public acceptance

Central bank digital currencies (CBDCs), a digitised form of money with revolutionary features that can potentially reshape financial systems, are viewed by many central banks as a necessary pursuit in their ongoing digital journeys. But public acceptance is a major challenge.

According to US think-tank The Atlantic Council’s CBDC Tracker, 130 countries, representing 98% of global gross domestic product, are now exploring CBDCs. And 64 countries are in an advanced stage of developing the currencies.

After sitting on the sidelines for several years, the European Central Bank announced last October a preparation phase to lay the foundations for a digital euro. This means all but one of the G20 nations are now in an advanced stage of CBDC development. The holdout is the US, which remains undecided about a digital dollar.

A survey by the Bank for International Settlement last year forecast that there will be 15 retail and nine wholesale CBDCs in circulation by 2030.

To date, only four developing countries - Bahamas, the Eastern Caribbean Currency Union, Jamaica and Nigeria - have introduced CBDCs aiming to enhance financial inclusion. But the adoption rates have been disappointing.

The Bahamas was the first in the world to launch a CBDC, called the Sand Dollar. It was introduced in 2020 but as of 2022, the adoption rate was only 7.9%. The Eastern Caribbean Currency Union experienced two weeks of outage soon after the launch of its digital currency, DCash, in 2021, which seriously dented confidence in long-term adoption.

Nigeria launched the eNaira in 2021 but less than 0.5% of the population became users after a year, and 98.5% of the wallets were not used even once a week. Jamaica went live with the Jam-DEX in 2022, and the uptake has been reported as “slow albeit increasing”.

The Asia experience

Asian countries have experienced similar challenges. China’s digital yuan is a prime example. The e-CNY has been heralded as a potential game changer for de-dollarisation in international finance and reducing reliance on the duopoly of Alipay and WeChat Pay in domestic e-payments. But in spite of the fact that the e-CNY pilot programme has been running for almost four years now, the Chinese don’t seem very enthusiastic about full adoption of the digital yuan.

Speaking at a lecture in Singapore in July last year, former People's Bank of China Governor Yi Gang said the value of e-CNY transactions jumped from 100 billion RMB (US$14 billion) in August 2022 to 1.8 trillion RMB as of June 2023, with 950 million transactions. Over 120 million e-wallets have been opened and 5.6 million merchants across 26 pilot cities have registered to use the digital currency.

The figures are impressive, but they were largely driven by promotion incentives, government measures and consumer curiosity.

The Chinese government went into overdrive last year to boost usage of the digital yuan. During the Chinese New Year holidays, 180 million e-CNY in the form of consumption coupons and programme subsidies were provided to support some 200 activities across the country after Covid-19 restrictions were lifted.

Beijing also directed local governments and state-owned enterprises to pay wages in e-CNY, enabled settling of payments in e-CNY on Taobao, Tmall, JD.com and other e-commerce websites, allowed foreign banks to participate in e-CNY trials, and permitted foreign visitors to top up their e-CNY wallets using international credit cards.

These efforts boosted e-CNY in circulation to 16.5 billion RMB as of end-June 2023, but this only accounts for 0.16% of China’s M0 money supply.

Interest from the private sector and consumers have thus far been lukewarm because China already has highly efficient digital payment systems which are deeply ingrained in everyday life. Around 943 million people or a whopping 87.5% of the population are using these services, making financial inclusion in the country among the highest in the world. So the advantages of a digital yuan are not immediately apparent to the people.

India faces a similar situation with its pilot e-rupee, launched in December 2022. Thirteen banks and 26 locations are now participating in the programme, involving over 1.75 million users and merchants including Reliance Retail, India’s largest retail chain. But the e-rupee is jostling with established payment giants like Paytm and Google Pay for public acceptance.

Singapore and Australia have said they see no immediate case for developing a retail CBDC. Japan, South Korea and Thailand have conducted small-scale pilot projects to explore the potential of CBDCs but they don’t seem to be going for adoption any time soon.

CBDCs are hailed for their potential to bolster financial inclusion and enable cheaper and faster payments, but some critics argue that these are not serious problems in Asia and the digital currencies seem like “a solution in search of a problem”.

Wholesale digital currencies

Wholesale CBDCs designed for large-value financial transactions using blockchain and tokenisation technologies are showing greater promise. According to an analysis by ratings agency Fitch last August, “wholesale CBDCs are generally more likely to make headway in the near term, as they are politically less controversial and technologically less challenging to implement”.

Various use cases have demonstrated that wholesale CBDCs can revolutionise domestic and cross-border payments between financial institutions, such as interbank transfers and securities transactions, by reducing costs, improving speed and reliability, and minimising intermediaries.

According to the CBDC Tracker, the number of cross-border wholesale CBDC projects worldwide has doubled to 12 since the start of the Russia-Ukraine war two years ago.

In Asia, a host of countries including China, Hong Kong, India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea and Thailand have examined or experimented with wholesale CBDCs over the past few years. While many are focused on domestic use, some are designed to handle cross-border transactions involving single or multiple CBDCs.

Single CBDC arrangements are easier to operate. Last year, two landmark cross-border settlements were successfully completed in China using e-CNY. PetroChina completed the first international crude oil trade using the digital yuan, and the Bank of China’s Shanghai branch settled a 100-million e-CNY gold purchase transaction with an overseas supplier via the Shanghai Financial Exchange International Board.

Multiple CBDC arrangements are more complex, requiring a high level of coordination and interoperability between jurisdictions. In 2022, the central banks of Australia, Malaysia, Singapore and South Africa completed a prototype platform to enable cross-border transactions using multiple wholesale CBDCs based on common rules established by the four participating central banks. This allowed commercial banks on the platform to directly transact with each other in any of these jurisdictions’ CBDCs without the need for foreign correspondent bank accounts.

Another multiple wholesale CBDC experiment, Project mBridge, involved the monetary authorities of China, Hong Kong, Thailand, and the United Arab Emirates utilising a single custom-built platform for testing international transfers and foreign exchange transactions.

Between August and September 2022, 20 commercial banks from these four jurisdictions initiated real-value transactions on behalf of their corporate clients directly on the platform using their respective CBDCs. Over 160 payments and foreign exchange transactions were completed, valued at a total $12 million. Settlements occurred within seconds rather than days, and costs were reduced to small fractions of current amounts.

Wholesale CBDCs have clearly demonstrated added value though there are still many issues to address, such as operational risks, cybersecurity, system scalability and resilience, privacy and money laundering. Importantly, they can complement existing large-value payments infrastructures rather than uprooting them, which will make their acceptance much easier.

Ultimately, the key to successful CBDC adoption is how it will fit within the financial system, and whether it can provide superior benefits to end-users and the economy.

*This article was published in Asia Asset Management’s 2024 February magazine titled “Key to success”.