For asset owners in Japan and Korea, investing in cryptocurrency is still off limits - but the solidity and safety of central bank digital currencies (CBDC) are a different matter.
As major central banks around the world have announced plans to start CBDC trials - including the Bank of Korea and Bank of Japan - asset owners told AsianInvestor they would consider investing in the digital asset class.
However, any investment would have to be predicated on an established credibility and a firm valuation model, and this could take anywhere between five and 10 years.
In the short-term, meanwhile, immediate investment opportunities for institutional investors are being seen beyond the currency itself.
The complex ecosystem around a successful rollout of CBDC - from supporting technology, online platforms, to machines that can read CBDC at physical stores - could of themselves be fruitful areas of investment.
Central banks representing one-fifth of the world’s population are likely to issue digital currencies in the next three years, a survey from Bank for International Settlements released in January showed. Discussions or trials are currently underway in all major economies, including the United States, Europe, and the Asia Pacific.
“If central banks like BoJ or People’s Bank of China (PBoC) issues digital currency with a firm background of valuation, we will discuss investing in those digital currencies,” said Kazuyuki Shigemoto, Japanese life insurer Dai-ichi Life’s executive officer and general manager of investment division.
Although CBDC and cryptocurrencies such as Bitcoin are both encrypted digital currencies, the major difference between them is that, CBDC is a fiat currency issued by a central bank, while Bitcoin is decentralized, outside any monetary system and circulated through blockchain technology.
“Currently, I don’t know what digital currencies issued by central banks really are,” Shigemoto told AsianInvestor. “But if the BoJ will issue digital currency, and the Japanese government issues digital government bond and have some coupon iterations, maybe I would invest in that.
"The most important thing is the background valuation of the digital government bonds, digital currencies, or even digital equities,” he said.
As of March 31, 2021, Dai-ichi Life had ¥37.85 trillion ($345.9 billion) of assets under management.
Similarly, the chief investment officer of a Korean asset owner said they didn’t own any digital assets and wanted to keep a distance from digital currencies, but were willing to consider it if such assets were backed by a central bank.
“If there are central bank-backed digital currencies…In this case, maybe our stance could change in future,” he told AsianInvestor.
However, he noted that it might take between five to 10 years for CBDCs to gain credibility through a proven track record before conservative asset owners would enter the field.
Sharing this view, an investment executive from a mid-sized Korean life insurer DGB Life Insurance told AsianInvestor that CBDC issuance was still at an early, and it continued to be difficult to foresee any relevant investment strategies.
“Insurance companies pursue conservative investments,” the executive said, adding that any kind of digital assets were still too risky and dangerous for them at the moment.
OPPORTUNITIES BEYOND CURRENCY
The BoJ announced the commencement of a one-year Phase 1 CBDC experiment on April 5.
In the announcement, the central bank said it would test the technical feasibility of the core functions and features required for CBDCs as a payment instrument, including issuance, distribution, and redemption. The test will end in March 2022.
Similarly, the BoK said on May 24 that it would start a 10-month test of digital won in August with a budget of W4.96 billion ($4.45 million). It will select a private technology supplier via bidding to research the practicalities of launching CBDC in a test environment.
Local media reported on May 14 that Korea’s largest online platform, Naver, will be involved in BoK’s CBDC trial, with its subsidiaries Naver Financial and Line Plus providing technological assistance, among other tech firms and financial institutions.
The world’s third-largest pension fund, the $763 billion National Pension Service in Korea, is the largest shareholder of Naver.
Carlos Casanova, a senior economist for Asia with Union Bancaire Privée, stressed that CBDC itself, and related financial products, could be an option, but more opportunities for asset owners lay in companies that can benefit from any potential CBDC rollout.
This includes financial and information technology providers in payment and consumer services, both domestic and cross-border, online and offline. CBDC rollout can also potentially reduce online transaction fees for e-commerce companies, Casanova said.
“There is potentially some benefit to getting exposure to the currency itself. But most of the upside will not be in that space. It will be in getting exposure to companies,” he told AsianInvestor.
Casanova noted that China is likely to be the first in rolling out CBDC after the 2022 Beijing Winter Olympic with a plan to test digital yuan with foreign visitors and athletes during the event.
Once the currency is in circulation more broadly, investors will get a better idea of what the ecosystem looks like, and how companies can benefit from the launch, in terms of volume of transaction and its impact on revenues, he said.