EXPERT EYE
Asia raises the bar for digital currencies Industry expert Amit Ghosh reviews the dynamic restructuring of Asia Pacific’s financial ecosystem in the wake of digitalisation Written by: Amit Ghosh, Chief Information and Services Officer at R3
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s digitisation increases across many industries, governments and businesses alike are looking at new and innovative ways to embrace technology. Central banks are no exception and APAC’s success with digital currencies is a prime example. Countries that have historically been at the forefront of currency developments, such as the US and the UK are no longer leading the charge. The desire to protect longstanding currencies has led to a “regulation first” not “innovation first” approach for many. The U.S. Fed, the Bank of England, the Bank of Japan and the European Central Bank are all currently exploring the technology. Meanwhile, the Bank for International Settlements (BIS), the so-called “central banks’ central bank” has been discussing Central Bank Digital Currencies (CBDCs) at length. So why are central banks, the heart of the economic establishment, so interested in a technology with such radical and revolutionary roots? In part, they are responding to challenges from private sector initiatives, such as Facebook’s 12 | APAC Outlook issue 52
Diem. However, CBDCs also suggest substantial benefits for general purpose use, which make them highly attractive in their own right. Specifically, central banks’ motivations include: • providing a cash alternative • promoting financial inclusion • increasing seigniorage profit (difference between a currency’s face value and the cost of its production and distribution) • implementing monetary policy • linking payments to identity • modernising payments for a digital economy. What’s interesting about the recent models is the collaborative approach many are taking with a supporting cast from the private sector. For example, the Bank of England has been researching what it calls the “platform model,” in which the bank is the only entity allowed to create or destroy a token, while leaving ‘payment interface providers’ (PIPs) to interact with end-users.
Others have gone a step further. Researchers at the International Monetary Fund have coined the term “synthetic CBDC” (sCBDC) to describe a model in which a non-central bank entity, such as a commercial bank, can issue a stablecoin backed by central bank reserves. Ultimately, it is likely that a variety of uses for CBDCs in the retail space and a number of different implementations will develop. These will have important benefits for a wide variety of institutions, from corporate treasury departments to payment networks open to the general public. The distinction is quickly blurring between the currently evolving retail CBDC models and previous projects with wholesale CBDCs. A CBDC is a great tool at the wholesale level, and its applications teach us a lot about the prospects for retail CBDCs. For example: Project Ubin with the Monetary Authority of Singapore (MAS) taught us that a blockchain-enabled CBDC supports more efficient complex payment workflows,
