A mounting desire among several central banks in Asia to create their own digital currencies could open the doors for asset owners into an asset class that looks set to be far better regulated and controlled than cryptocurrencies, predict investment experts.
China, Korea, Japan and other nations are all eyeing plans to roll out central bank digital currencies (CBDCs) in the coming year or two. Their plans are emerging as the world’s largest cryptocurrency, Bitcoin, has seen its price rise rapidly but jaggedly in recent weeks.
The value of a bitcoin hit daily records in late December and early January, only to fall by as much as 17% on January 4, before swiftly regaining this ground and climbing above it to $35,242.5 as of 4.30pm on Monday (January 11).
This performance underlines the view of most institutional investors that cryptocurrencies are too unpredictable to be trusted. But CBDCs offer what is likely to be a safer alternative.
“Every central bank globally has done some sort of market engagement, outreach, or discussion [about CBDCs] and we have been involved in a number of those discussions,” said Neil Sheppard, chief operation officer of financial services at Diginex, a Nasdaq-listed digital asset financial services and advisory.
“I think it’s happening. The question to answer is: What is the purpose of CBDCs? Is it really for trading… or more to enable that technology to [ease] the transfer of value?"
CBDCs are at such an early stage of development that they lack a precise definition. It is likely that they would essentially be a form of digital money in circulation from central banks, something that is defined as a liability on their balance sheets, according to a 2020 Deloitte report.
The careful distribution and control of digital currencies by central banks means they will prove far less volatile – and therefore less rewarding – than today’s cryptocurrencies.
“In the short term, it is not going to impact the currency markets as much as the digital securities markets,” Sheppard said, explaining that CBDCs would be a way for people to buy other digital securities.
That stability might well offer some appeal to asset owners.
“Eventually, institutional investors will invest in [CBDCs],” said Oriol Caudevilla, a fintech adviser and research expert on digital currencies. “It’s not the best possible investment when it comes to return because it is not made for speculation. But at the same time there is this element of stability and a lack of risk, and that's something that of course investors appreciate.”
Sheppard believes CBDCs also offer asset owners several other potential benefits, over traditional currencies.
“The benefits for institutional investors come when they get more comfortable with broader digital securities, including stablecoins, CBDCs and so on. At the moment if you want to trade any kind of digital security asset, you have to take fiat and transfer it into a digital version, whether stablecoin or digital currency,” he said.
Stablecoins are asset-backed cryptocurrencies that attempt to minimise volatility by pegging their price to assets such as fiat money or commodities.
CHINA IN FRONT
To date only one country has launched a CBDC. The Bahamas launched its Sand dollar last October. However, several Asian countries are looking at developing their own.
China is likely to be the first. It is testing its digital renminbi in cities including Shenzhen, Suzhou and Chengdu, but an official launch to the virtual currency is not expected for another year at least.
“Even though The Bahamas has been the first country to deploy its own CBDC, China will very likely be the first major economy in doing so. Logistically speaking, it will be a much bigger challenge in China than it has been in The Bahamas, due to the size of China's financial system, but it seems that China is going in the right direction," Caudevilla told AsianInvestor.
Similarly, the Bank of Korea and the Bank of Japan also plan to run CBDC trials this year. The Hong Kong Monetary Authority, together with the Bank of Thailand, also launched a joint research project on the applications of CBDCs and blockchain for cross-border payments. BoJ and HKMA offered press releases on their plans in response to AsianInvestor questions. BoK did not reply.
“The two authorities (Bank of Thailand and HKMA) also intend to enhance the cross-border corridor network prototype to support CBDCs of other central banks in the region. They will soon bring banks and large corporates into trials using actual trade transactions," the HKMA said in a statement, in response to AsianInvestor questions.
In July 2020, the Monetary Authority of Singapore (MAS) and Temasek Holdings released a report that marked the completion of Project Ubin, which was launched in 2016 to explore the potential applications – such as a digital form of the Singapore dollar – of blockchain and distributed ledger technology.
A Temasek spokesman said that the project demonstrated the usefulness of blockchain technology to “rearchitect financial market infrastructure”. The state investment manager is now working with financial institutions JP Morgan and DBS Bank to create a clearing and settlement network for domestic multi-currency payments enabled by blockchain technology.
“The network will initially be available to banks based in Singapore, with plans to expand access to other financial institutions at a later stage. Pilot trials will commence in 2021 and more details will be shared in due course," the spokesman said.
MAS did not respond to requests for comment.
The European Central Bank is also working on a digital euro, although “this may still take us three years to get it for real,” Caudevilla said. “The US is still a bit reluctant about the idea of a digital dollar, but I am pretty sure that eventually they will get there.”
Look out for the second part of this story soon, which looks at what sort of financial market benefits digital currencies might offer to asset owners.