As the pandemic accelerates digitalisation, issuing digital forms of fiat currencies is at the forefront of many central banks’ plans. Termed central bank digital currencies (CBDCs), APAC is leading the charge in this space with active pilots and research on the technology by regulators here. But what would the future of CBDCs actually look like – and why does it matter?
To understand this, it helps to zoom out on how the economy has changed in the past year. The pandemic pushed a record number of businesses online, and widespread disruptions created a profound shift in payments, accelerating the adoption of digital wallets in e-commerce while hastening the decline of cash at the point of sale.
According to our 2021 Global Payments Report, digital wallets exceeded 60 per cent of online payment methods in APAC in 2020 and by 2024 will make up 65 per cent of online transactions. Cash is projected to represent only slightly over 10 per cent of transactions in APAC by 2024, and the decline of cash will be near total in some markets, falling to 5.9 per cent in China, 2.1 per cent in Australia and just 1.6 per cent in Hong Kong.
While today most digital payment methods connect back to a traditional credit or debit card, that’s changing. The last 12 months have also seen a rise in cryptocurrencies such as Bitcoin, which rose to a new record high of more than US$50,000 in February.
COVID-19 accelerates the use of digital currencies
The uncertainty created by the ongoing pandemic has led to cryptocurrencies including Bitcoin becoming mainstream. Both Apple Pay and PayPal recently started supporting bitcoin payments in the US. In Asia, Singapore’s DBS bank launched a digital currency exchange last December – this is the world’s first cryptocurrency exchange backed by a traditional bank.
As consumer demand for digital currency payment options rises, merchants in Asia are now beginning to accept such payment options across various channels. For example, in Japan bitcoin is accepted by over 260,000 stores and Japanese e-commerce giant Rakuten had just launched a crypto wallet this month that allows users to shop both online and in-store using crypto.
Merchants across Asia now accept crypto payments as well, such as Singapore’s food court operator Kopitiam, Hong Kong’s furniture chain Pricerite, Malaysia’s online pharmacy Gootbat.care and South Korea’s convenience store chain CU, to name a few.
While cryptocurrencies are rising in popularity, they are decentralised and operate independently of established banking or money transfer systems. This means they lack the legal tender status declared by governments and if a country’s citizens all start using another currency the government cannot control monetary policy.
CBDCs on the other hand brings together the convenience and security of cryptocurrencies and the regulated, reserve-backed money circulation of the traditional banking system. They act as the digital form of fiat money effectively replaces notes and coins.
More than 8 in 10 central banks are now actively engaged in CBDC projects, according to a survey by the Bank of International Settlement. One of the most advanced is China’s digital yuan, which has already undergone trials in a number of cities locally.
CBDCs are the future
The growing popularity of cryptocurrencies, coupled with the rapidly declining use of cash, is putting pressure on central banks to accelerate their digital currencies efforts. In the coming years CBDCs will play a key role in the financial services ecosystem and could eventually bring about the demise of cash all together.
A centrally-backed digital currency provides better security, while reducing fraud and lowering costs. It allows for better monitoring of financial activity making crimes such as tax evasion much more difficult and offers a higher level of control and traceability in comparison to private cryptocurrencies and cash, with better tracking for tax collection.
There are also social motivations. They could make the transfer of money across borders easier and this will have many positive implications like enabling foreign workers, for example, to transfer money back to their home countries. They can broaden financial inclusion, allowing access cash and funds to more people around the world, particularly in emerging economies.
Digital currencies could also help businesses with cash flow, especially in the hard-hit retail and hospitality sector. We also may see the rise of programmable money, which could allow key workers discounted goods and service tax rates, among many other features.
Challenges facing CDBC
However, questions remain around how CBDC will be regulated and how they will interact with existing forms of currencies, and there are also concerns that CBDCs could draw money out of private banks.
The creation of CBDCs raises privacy concerns as well. With a large amount of data stored in a central system, this means that an individual’s financial information could be easily surveilled by the government or worse exposed to criminals. Ultimately, there will need to be a marriage of trust and opportunity for digital currencies to see mass acceptance.
Once it goes mainstream, CBDCs will be a game-changer, bringing about a rapid shift to the banking and payments ecosystem that has never been seen before, and with more and more countries now beginning to implement their own CBDCs, 2021 could be the year when CBDCs have the chance of becoming a reality.
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