The future of money: Benefits and barriers to adopting CBDCs in Apac
The idea of Central Bank Digital Currency (CBDCs) as the next evolution of fiat currencies is catching on globally, particularly across Asia Pacific (Apac). Across the region, we’re seeing experimentation with CBDCs and a focus on a wide range of use cases. The Monetary Authority of Singapore (MAS) has initiated trials to explore the foundational technology infrastructure and technical competencies necessary to issue retail CBDCs. Already, the MAS has engaged in partnerships to develop a CBDC for seamless and cost-effective movement of money from one country to another. Elsewhere, the Reserve Bank of Australia’s CBDC trial continues, with a recent landmark cattle sale using the piloted “eAUD”. Smaller jurisdictions like the Republic of Palau are also pursuing this path, having recently launched a controlled retail pilot using a USD-backed stablecoin and the Hong Kong Monetary Authority is optimistic about retail use cases.
With central banks across Apac exploring the use of CBDCs, private sector adoption seems inevitable. According to Ripple’s 2023 New Value Report, 76% of global organisations surveyed were either “extremely” or “very” confident that CBDCs can meet their business needs, similar to the confidence levels they indicated in traditional currencies. Cross-border payments (37%), consumer-to-business payments (35%), and wholesale (34%) are rated as the top three most cited use cases for both CBDCs and stablecoins.
So, what are the benefits, determining factors and barriers when it comes to the adoption of CBDCs?
Financial inclusion
According to Ripple’s New Value Report, financial inclusion ranked in the top three most important considerations for CBDC use. This is important for countries with a lack of infrastructure and a high rural population without easy access to physical banks.
Going back to Palau, the driving force behind its CBDC pilot was to mobilise its economy and government processes. This is in the hope of improving financial transactions by enabling wider use of digital value and payment methods, lowering overall transaction fees for citizens, cutting FX costs and speeding up payments — all helping to empower the people of Palau to find greater financial success.
CBDCs offer the ability to extend even the most basic financial services to historically underserved populations through mobile phones and digital wallets. This gives citizens the ability to send and receive payments anytime, anywhere, even if they don’t have a traditional bank account.
Cross-border payments and interoperability
Historically hesitant toward cryptocurrencies, governments will see CBDCs as a means to digitise fiat currency while maintaining the traditional financial system status quo. Juniper Research expects initial CBDC pilots to address domestic payment challenges first, representing approximately 92% of total global CBDC transactions by 2030.
While the focus is currently on establishing local systems, interoperability with other fiat currencies and CBDCs will inevitably be a question. Currently, the payments landscape in Apac is highly fragmented with each country having its own unique currency, process and payment infrastructure. The Bank for International Settlements (BIS) identified interoperability for cross-border payments as a major priority for CBDCs in its 2021/2022 innovation programme.
Central banks can utilise existing blockchains, though many struggle with the transaction volume demanded by a successful retail CBDC. Additionally, these public ledgers lack the privacy and control essential for central banks.
The answer lies in CBDC private ledgers — a secure, controlled, and adaptable method for the issuing and management of digital currencies. Private ledgers implemented using distributed ledger technology (DLT) provide seamless settlement interoperability, safeguarding the monetary and technological autonomy of central banks while addressing existing challenges and risks in cross-border payments. The streamlined interaction regionally and globally helps to enhance the utility of CBDCs, paving the path for an innovative cross-border payment ecosystem.
Mitigating retail risk
According to the BIS, with appropriate regulatory safeguards, the risks posed by retail CBDCs — including higher funding costs and liquidity risks for the banking system, as well as risks to domestic credit creation and financial stability — can be reduced when managed properly. Measures including hard limits to prevent excessive CBDC holdings, as well as restrictions on the use of CBDCs by non-residents are steps governments can take to minimise risk for retail CBDCs.
These risks could be tempered further by innovative design and technological solutions built into a new digital currency. CBDCs built on DLT introduce new toolsets and options that regulators can use to solve previous trade-offs and implement proactive safeguards aligned to policies and regulations. Such safeguards can ensure that retail CBDCs serve primarily as a medium of exchange and not a major store of value.
It is imperative to encourage and support the introduction of legislation that includes clear and fair definitions for all digital assets, which delineates jurisdiction among regulatory bodies. Regulation provides a credible framework for crypto to safely innovate, grow and build confidence in its utility.
Safeguarding privacy
Lastly, privacy is and should be a key consideration for the implementation of CBDCs — as is the case with any government or public sector project involving the personal information of citizens. Similar to existing financial systems, ensuring privacy is a comprehensive and legally challenging process that balances functionality with consumer privacy and the prevention of illicit activity.
Central banks will need to prioritise broad access and ease of use to ensure their currencies are adaptive and scalable. If not, they risk losing control of the infrastructure for global digitised services. CBDCs should not be designed to give governments access to all consumer data. Responsible design choices, including implementing messaging layers for example, will give the government the tools it needs to balance security and functionality.
While the challenges of CBDCs remain, adoption trends are promising. We have seen many use cases of CBDCs across Apac that point towards the possibilities of a centralised digital currency system. With the right technology in place, central banks can ensure privacy and cybersecurity are embedded into the design of CBDCs. At the same time, ensuring interoperability and implementing safeguards to mitigate risks will ensure we can all realise the benefits of CBDCs — from faster, more cost-effective transitions to increased financial inclusion.