Central bank digital currencies (CBDCs) could offer a cheaper and more efficient means of accessing new digital asset classes in the coming year or two. 

As AsianInvestor has reported, CBDCs are gaining interest from several regional central banks, including those of China, Japan, Korea and potentially Singapore. They are likely to be ready for broad usage from 2021 or 2022. 

Digital currency insiders think that CBDCs are unlikely to end up being traded on digital exchanges, as cryptocurrencies or fiat currencies are; experts say they simply aren't designed to be. Instead, they are made mostly to ease digital transactions in a well-regulated manner. 

Where the CBDCs are likely to come into their own is their ability to let investors buy into instruments such as digital bonds or as a means of accessing other forms of digital asset.

Digital bonds would likely be a particularly complementary asset class, particularly given their gradual growth in recent years. The World Bank issued the first blockchain bond in 2018, which raised A$110 million ($83 million). The deal drew interest from institutional investors such as the Commonwealth Bank of Australia, the arranger for the bond, First State Super, NSW Treasury Corporation and Northern Trust.

Then in September 2020 HSBC, Singapore Exchange and Temasek Holdings jointly piloted one of Asia’s first digital bonds for commodities trader Olam International; a S$400 million ($303 million) transaction that used distributed ledger technology.

No specific figures exist of the size of the outstanding digital bond market to date. However, Neil Sheppard, chief operating officer of financial services at Diginex, a Nasdaq-listed digital asset financial services and advisory, predicts that many more such digital transactions will emerge, complimenting the need for CBDCs.

“It [the underlying technology] will permeate all parts of the financial ecosystem, growing every day and it only makes more sense that investors take advantage of what technology allows,” he said.

If digital bonds end up comprising just a few percentage points of the global bond market it would create a market worth hundreds of billions of dollars; SP Global estimates global bond issuance stood at $6.66 trillion in 2020. And increasing use of digital bonds seems quite likely; Sheppard noted that using a digital currency to trade digital securities would also be easier than switching between fiat and digital.

The ease of use was echoed by Michael Wong, managing director and co-founder of Mai Capital, a blockchain investment manager

“We invest in digital assets, [and] CBDCs [would] allow us to stay in the digital world – if we buy bitcoin and want to sell it, we don’t need to convert it into dollars in fiat form,” he told AsianInvestor. “Using an electronic version like CBDCs makes sense for us from an operational perspective. And it reduces costs to do hedging especially for cross border investments.”

ENCOURAGING TOKENISATION

The spread of digitised dollars, euros and renminbi would also encourage companies and sovereigns to issue tokenised digital assets. 

Tokenised assets are digital, and hence more liquid, representations of traditional assets that can be traded more quickly and allow for the purchase of the assets in smaller fractions. That means that large illiquid assets such as real estate can, at least in theory, be divided into tokens that can be sold. 

The digital assets could be more efficient for investors that use them, particularly if they gain mass acceptance. Wong offered the example of international investors buying tokenised real estate assets in Thailand using digital dollars, noting that they would be able to avoid having to spend money converting dollars they hold into Thai baht. 

"The successful introduction of CBDC will attract much attention in the field of tokenisation, especially with government and institutional investors’ confidence in the digital tokens and blockchain technology," agreed Rita Lau, associate director of valuation and advisory services of Asia at Colliers International.

"In the long term, CBDC will definitely offer a simplification of payment processing with significant efficiency for transaction of tokenised real estate products," she told AsianInvestor.

However, Lau cautioned that it will take a group effort among investors and regulators to maximise the potential of tokenised real estate investments.

CBDCs could also open the doors to other tokenised digital assets such as intellectual property rights, precious wines, and airplane engines, to name a few.

Indeed, the tokenisation of assets has already begun. In November, an artwork by Chinese artist Wang Xiao Bo was tokenised and launched by law firm DLA Piper in Hong Kong and in 2019, real estate investor Stan Group, also in Hong Kong, announced plans to sell tokenised real estate.

More will come. “There will be new asset classes created, which use the infrastructure of the wallets and tokens to eventually tokenise new products, which would be applicable for institutional investors and retail investors,” Benjamin Usinger, co-lead of KPMG's crypto and blockchain advisory services in Hong Kong, told AsianInvestor

"With the advent of CBDCs, institutional investors and every customer essentially of a bank will become more used to the concept of digital currencies... Taking both the infrastructure and the getting used to this asset class together, there will be a lot of financial innovation happening," he said.

For example, Unionbank in the Philippines launched a tokenised fiat for remittance in 2019 and announced plans to test tokenised blockchain bonds with Standard Chartered in December.

In addition to this, intrepid investors may be able to take advantage of the emergence of CBDCs as an investment opportunity, noted Wong.

“A few days ago, it was announced that Ukraine was doing a CBDC and was using [tech company] Stellar as the underlying blockchain protocol. In that case, Stellar itself would be potentially an investment vehicle to look at,” he explained.

Crypto cynicism

Institutional investors are showing more interest in cryptocurrencies but have yet to be convinced to become major investors, despite the recent Bitcoin rally.

The cryptocurrency surged to over $40,000 on January 8 for the first time and wavered around $36, 760 on Friday (January 15). However, institutional investors are still buying cryptocurrencies at a much lesser extent than other products, observed Oriol Caudevilla, a financial technology adviser and researcher.

Only 9% of cryptocurrencies investments come from institutional investors. Canada Pension Plan Investment Board (CPPIB) and Singapore sovereign fund GIC said last year that they remained sceptical over Bitcoin.

Price volatility, the perception of criminal use, and abrupt changes in regulation have been cited as reasons for scepticism over Bitcoin.

“There is always an element of risk when it comes to never knowing what the regulator is going to next week. For example, Hong Kong recently announced changes in the regulation of crypto-related companies,” Caudevilla told AsianInvestor.

Asset owners have found other ways to invest in digital assets. GIC reportedly invested an unspecified amount into US crypto exchange Coinbase, and Korea’s National Pension Service reportedly put W2.6 billion ($2.44 million) into cryptocurrency exchange operators.

“We will probably start to see the prevalence of [cryptocurrency] vehicles similar to ETFs this year which will give institutional investors access and exposure to the underlying asset class,” said Neil Sheppard, chief operating officer of financial services at Diginex.