Southeast Asia at the forefront of the CBDC revolution

The coronavirus pandemic led to a massive acceleration in the spread of digital payments and cryptocurrencies. This, in turn, has led central banks around the world to test central bank digital currencies (CBDCs), a digital form of hard currency based on blockchain, but backed and issued by a central bank.

A report by The Economist recently noted that, with the exception of China, it is the medium-sized emerging economies that are most interested in CBDCs and most advanced in their development.

Such states are "too large to accept the loss of monetary autonomy" associated with cryptocurrency, but at the same time "small enough to be exposed to the risk of currency competition", another potential pitfall of transnational digital technology proliferation with respect to these currencies. Nowhere is this truer than in Southeast Asia.

The region has long been at the forefront of new financial technologies: OBG has recently explored how several Southeast Asian nations are pioneering digital payments, cryptocurrencies and blockchain.

For example, last year, the Philippines' central bank approved 16 cryptocurrency exchanges, while statistics firm Statista found that 20% of Filipino participants had used cryptocurrencies by 2020, placing the country third in terms of adoption, after Nigeria and Vietnam, which were first and second, respectively.

However, Vietnam is a rather special case. The country is experiencing high levels of growth in digital currencies despite the Central Bank's ban on their use as a form of payment. In this, it is representative of a global trend.

Being decentralised and international, the value of cryptocurrencies is determined by the market and is not influenced by levers such as monetary policy or the balance of trade. Moreover, it facilitates, and even encourages, money to flow across borders. This has led national governments and central banks to try to reduce its proliferation, usually with limited success, as the example of Vietnam shows.

This lack of success is partly why many individual nations are changing their positions and trying out CBDCs, which also use blockchain technology but preserve a country's monetary sovereignty.

Once again, Southeast Asia is at the forefront of this trend.

In October last year, Cambodia saw the nationwide launch of its CBDC, known as Bakong. In the pipeline since 2016, it was developed by the National Bank of Cambodia in collaboration with SORAMITSU, a Japanese-Swiss financial technology (fintech) company.

The project has reportedly been used by almost a third of the population. It is hoped that the low barriers to entry can act as a stimulus for financial inclusion, which is one of several benefits of CBDCs that are attractive to emerging economies.

Singapore, meanwhile, has long been a pioneer in digital payments, and in December last year the Monetary Authority of Singapore (MAS) concluded a five-year study on blockchain and distributed ledger technology, called Project Ubin.

While there are currently no plans for expansion of Project Ubin, in June the ASEAN Financial Innovation Network, a non-profit organisation jointly run by MAS, the International Finance Corporation and the ASEAN Bankers Association, announced the launch of a new digital currency sandbox, in which banks and fintechs will be able to create and test CBDC applications.

Elsewhere, in May this year, the Central Bank of Indonesia announced that it planned to launch a CBDC and is currently evaluating which platform to use. This is partly due to a recent increase in online banking activity: in April, the bank reported that the frequency of transactions on digital banking platforms increased by 60.3 per cent year-on-year.

The country currently bans the use of cryptocurrencies in transactions, but they are allowed to be traded.

Meanwhile, in June, Thailand awarded a contract to develop a CBDC to Giesecke + Devrient Currency Technology, a German company.

In addition, the country's central bank has collaborated with US-based blockchain company ConsenSys and the Hong Kong Monetary Authority on a cross-border CBDC.

As the latest example suggests, the disruptive potential of CBDCs goes beyond individual economies.

Researchers working at Kobe University in Japan have recently published a series of papers describing proposals for a common digital currency across East Asia.

The authors argue that, since the US dollar remains the main trade invoicing currency in the region, Asian economies tend to be heavily affected by US monetary policy.

In this sense, the introduction of a common digital currency, based on blockchain and issued by individual central banks, could serve to promote integration and deepen cooperation within multilateral frameworks, as well as protect the rights of small and medium-sized economies.

The use of blockchain, online banking and digital payments means that there would be no need to issue paper money, which until recently was a major obstacle to such a project.

While this proposal may still be at an embryonic stage, in light of the rapid and significant changes that affected global monetary systems in the wake of COVID-19, it would seem prudent to expect the unexpected so far.