Asia-Pacific CBDC Projects Achieve Financial Inclusion in Underbanked Areas

On November 23, the Bank of Japan announced that it has begun to plan a Central Bank Digital Currency (CBDC) program with three megabanks and with regional banks and will trial a digital yen in 2024. If the project is successful, the Bank of Japan will seek to launch a digital yen in 2026.

Japan has become one of the most recent countries in the Asia-Pacific region to plan for a CBDC implementation. Many projects in the region are at a similar stage of development, with the strong growth in private crypto assets creating a push to consider the advantages of a CBDC. While many countries are in the research and development stage—with some at advanced stages of testing and pilot programs—only a few countries are geared to launch their CBDC in the near future, reflecting the considerable uncertainties of such a solution.

Asia-Pacific countries have been at the forefront of payment innovation, with a growing interest in CBDCs becoming the natural next step. There are myriad reasons why the region is showing an increased interest in such a solution; countries such as India and the Philippines have installed successful payment systems and now seek to leverage a CBDC to improve their current frameworks by lowering transaction costs and increasing efficiency while emerging economies see CBDCs as helping them to achieve financial inclusion and financial stability.

While not necessarily a silver bullet to tackle this issue of underbanked populations, many central banks across the globe increasingly perceive CBDCs as another mechanism to better drive financial inclusion. CBDC design options are being carefully weighed around; promoting innovation in a financial system which permits third-party payment service providers, offering a strong network at reduced cost supporting offline payments, facilitating enrolment and education through KYC and furthering interoperability within borders and externally. These innovations are being heavily targeted to address a range of existing barriers to financial inclusion.

In the last two months (October to December 2022), the following declarations have been made:

• Pakistan’s central bank has announced it has gathered enough information and research to introduce its own safe and secure digital currency that will be deployed via blockchain technology to reduce reliance on physical cash.
• Turkey is readying its economic infrastructure for the launch of an e-lira in 2023; Turkey's central bank had announced in September 2021 that it was considering issuing a CBDC to complement its existing payment infrastructure.
• The Hong Kong Monetary Authority has revealed plans to launch its two-tier CBDC ecosystem that will enable customers to store digital HK dollars as either CBDC-backed stablecoins or intermediated CBDC tokens in a digital wallet and to use them in a retail environment. The Hong Kong solution involves both a retail e-wallet system for issuing the CBDC among citizens and an interbank system for the issuance of digital HK dollars to commercial banks.
• The Central Bank of the UAE has finalized one of the largest-scale pilot of CBDCs, utilized by 20 banks for real-value transactions across borders. The project has been forged in partnership alongside the Hong Kong Monetary Authority, the Bank of Thailand, the People's Bank of China's Digital Currency Institute, and the Bank for International Settlements.
• The Reserve Bank of India (RBI) has prepared to issue a retail form of the digital rupee after a satisfactory test phase for the wholesale use of its CBDC. Cash-heavy India is following the example of countries such as China in implementing CBDCs to make transactions more efficient and to improve payment services, with the central bank announcing that it will launch its first pilot program for a retail e-rupee on December 1. The RBI has already been running a pilot program for its wholesale CBDC since November 1.

Introducing a CBDC is by no means a simple issuance procedure and will have significant consequences in all areas of the economy—including households, businesses, and the country’s monetary system. This will pose a significant risk depending on how the CBDC is implemented. It could potentially include state surveillance of citizens’ purchasing habits, financial turbulence when people transfer bank deposits to CBDC during periods of economic downturn, a sharp increase in central bank power without appropriate review or accountability, and the creation of a centralized point of failure that would become a threat vector for hostile actors.

One of the great unknowns surrounding a CBDC launch is that, with many citizens transferring money out of regular bank accounts and into CBDC wallets, the volume of money transacted cannot be anticipated. Without safeguards such as limits on the amount of CBDCs individuals can hold, this disintermediation process could exacerbate financial instability during periods of economic strife as people seek to replace bank deposits with what they perceive as a safer option. On the other hand, there are also consequences that would arise if restrictions were imposed. ABI Research believes that limits on CBDC holdings—or charges on large holdings—would lower the pull of using CBDC for users, in turn detracting from the overall objective of increasing financial inclusion or securing market share from privately issued coins.

The creation of cryptocurrencies such as Bitcoin originated from a will to circumvent government controls over monetary transactions. Under the decentralized ledger format, a government-driven institution such as a central bank has no role to play in the cryptocurrency market ecosystem. This also means that there is no national boundary in transactions and no role for taxation. CBDCs have seen more attention in the past few years as coins such as Bitcoin and Ethereum have exponentially risen in value, and their unregulated nature has caused issues with global central banks that are now looking to launch CBDC’s to cement their place in the economy of the future.