Ready to bloom: the rise of CBDCs in Asia
As some parts of the world continue to deliberate the feasibility and consequences of adopting central bank digital currencies (CBDCs), 2023 witnessed Asia surge ahead of the pack in terms of development and implementation.
Asia has surged ahead of the pack in the global pursuit of CBDCs
So what has motivated Asian nations to take the lead in the global pursuit of CBDCs and how is the region accomplishing its goals?
Global CBDC summary
Before we start, it’s important to note that CBDCs fall into two categories: retail and wholesale. Retail CBDCs are accessible by members of the public, whereas wholesale CBDCs are only accessible for use by a select group of financial institutions, primarily for the settlement of interbank and securities transactions.
In recent years, the CBDC landscape has shifted rapidly, with the Bank for International Settlements (BIS) reporting that 93% of central banks are actively involved in CBDC development. Countries are launching pilots and forging partnerships to determine the viability and potential impacts of adopting this new form of currency.
But we are still in the infancy of CBDC adoption. At the time of writing, only the Bahamas, Jamaica, and Nigeria have a fully live CBDC in operation, all of which are retail.
Nations such as the US and UK are lagging in the CBDC race. Just last month, Jerome Powell, chairman of the US Federal Reserve, was quoted as saying that the Fed is “nowhere near recommending, let alone adopting” a CBDC, while the Bank of England and HM Treasury say “no final decision has been made to pursue a digital pound” in the UK, adding that “work will continue during the design phase exploring its feasibility and potential design choices”.
Meanwhile, it’s in Asia where we’re seeing some of the most significant leaps forward in CBDC development.
Described as resembling “100 flowers blooming” by Nicholas Soo, head of payment products, global payments solutions, Asia Pacific at HSBC in comments made to FinTech Futures, the Asian CBDC sector is poised to flourish.
Let’s examine some notable instances of CBDC advancements in Asia.
Hong Kong
Hong Kong is leading the way in the wholesale CBDC sector, ranking first in PwC’s global wholesale CBDC index for 2023.
Currently, Hong Kong is engaged in several pilot projects, including mBridge, Ensemble, and Sela. Most notable is Project mBridge, which is exploring a multi-CBDC common platform for cross-border payments. This initiative has facilitated over 160 payment and foreign exchange transactions totalling around $22 million.
The project stands as one of the first pilots to effectively settle real-value cross-border transactions for corporate entities and is evidence of regulators across the region collaborating – with 20 banks across four jurisdictions participating in the scheme.
Singapore
Singapore, one of eight nations to state it started a CBDC pilot in 2023, is ranked third in both PwC’s wholesale and retail CBDC indexes.
The Monetary Authority of Singapore (MAS) has previously said that there is “no pressing need” for a retail CBDC in the country. This is in line with the interpretation of HSBC’s Nicholas Soo, who says the “use case for a retail CBDC is not as apparent” as its wholesale counterpart.
However, in 2022, MAS launched Project Orchid, which delved into the potential applications of a purpose-bound digital Singapore dollar (SGD) and the necessary supporting tech. While not a CBDC trial per se, it represents MAS’s exploration into the infrastructure required to facilitate digital currency transactions in the future.
MAS’s chief fintech officer, Sopnendu Mohanty, notes that “wholesale digital currencies offer efficiency gains across a broad spectrum of cross-border use cases,” underscoring the extensive exploration by the Singapore central bank in this area.
In late 2022, the financial institution unveiled its Ubin+ project, which builds upon the foundations established with the original scheme (Project Ubin 2016-2020), aimed at enhancing the country’s capacity to utilise digital currency-based infrastructure for cross-border transactions.
India
According to PwC, India leads the way in CBDC adoption thanks to its work on the digital rupee.
RBI is close to launching a fully live retail CBDC
In contrast to the preceding examples, which have primarily focused on wholesale projects, India has taken a different approach.
While also implementing a wholesale scheme of its own, the country has made significant strides with its pilot for a retail CBDC, known as the digital rupee (or e₹), launched by the Reserve Bank of India (RBI) in December 2022.
India’s government believes that a retail CBDC will foster financial inclusion and advance the nation towards a cashless economy.
Throughout 2023, the RBI expanded its retail CBDC initiatives, uncovering numerous relevant use cases such as interoperability with UPI and offline capabilities. There is an anticipation that the country will issue a fully operational retail CBDC in 2024.
Why is CBDC adoption a priority for Asian countries?
Asian nations are emerging at the top of the most recent indexes for CBDC development, so what factors could be driving the push for CBDC usage in the continent?
Promoting financial inclusion
For developing nations in Asia, such as Cambodia, Laos, and Myanmar, CBDCs serve as a “beacon of hope” for enhancing financial inclusion, according to the authors of the paper Asian CBDCs on the rise: An in-depth analysis of developments and implications in the Journal for Quantitative Finance and Economics.
This is a result of new digital currencies enabling peer-to-peer transactions among individuals without requiring traditional bank accounts or internet connectivity.
Additionally, the paper suggests that a retail CBDC in the region could help promote inclusion by offering affordable payment alternatives.
Combating US dollar hegemony
Asian markets are recognising the potential of CBDCs to reduce reliance on the US dollar in bilateral transactions. As outlined in The Diplomat, numerous emerging markets in Asia struggle with weak currencies, particularly when it comes to engaging in international trade or obtaining corporate or government debt.
Typically, these markets are compelled to conduct trade and borrowing transactions in US dollars, which can be detrimental when repaying debts in dollars with a depreciated currency. CBDCs offer these countries the ability to settle debts by directly transferring digital currencies, therefore circumventing the use of dollars.
Safeguarding financial integrity
CBDCs decrease physical cash expenses
For emerging Asian economies, CBDCs offer the potential to decrease expenses linked with physical cash and coin management.
By reducing dependence on paper currency, CBDCs will save states from costs related to distribution, issuance, printing, and storage. Furthermore, they present the opportunity to mitigate financial crime and counterfeiting risks, thereby safeguarding the financial integrity of these developing economies.
India serves as a prime example of this, as in 2016, the government demonetised two banknotes, which accounted for 86% of all currency in circulation, as part of an initiative to combat financial crime and undeclared wealth.
Concluding thoughts
It’s clear that the adoption of a CBDC, whether retail or wholesale, holds numerous advantages for countries in the region. These include fostering financial inclusion and innovating cross-border payments.
However, it is important to note that the quick implementation of any new digital currency carries inherent risks, including cybersecurity threats, the growing need to enhance public digital literacy, and the intrinsic vulnerabilities of technological infrastructures.
Moreover, as Soo warns, “while interest in CBDCs is growing, so is the risk of fragmentation”. Although banks and regulators have been seen to work together in various pilot schemes, it is important to recognise they each have different motives for experimenting with this new form of cash.
Soo says the race we are witnessing in Asia is creating a “widening range of technologies and standards”, adding that countries and financial institutions must continue to cooperate while keeping “interoperability in mind”.
When attempting to forecast the future of CBDCs in Asia, only time will tell. If executed successfully, both the established and burgeoning economies within the region stand to gain from the advantages ushered in by tokenisation and CBDCs.
