Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly on January 17, 2022 - January 23, 2022

THE emergence of digital assets has prompted central banks around the globe to look into rolling out their own digital currencies, with China being the most advanced as it began testing its digital currency in late 2019.

China’s plan to officially launch the digital yuan could be as soon as this year, according to news reports. It is currently being tested in 12 cities and regions in the country.

The digital yuan is mainly used by the public for domestic retail purposes at the moment, according to a white paper on the progress of the R&D on the digital yuan released last July. “It is a value-based, quasi-account-based and account-based hybrid payment instrument, with legal tender status and loosely-coupled account linkage ... It is mainly a substitute for cash in circulation, and will coexist with the physical yuan.”

In the eurozone, although the digital euro is not ready for use now or anytime soon, European Central Bank executive board member Fabio Panetta said last November that the digital currency could ensure a public guarantee for cash and act as a pre-emptive move in the event that tech giants take over the payment industry by tapping cryptocurrencies.

On the home front, Bank Negara Malaysia shared its initiative in the digital currency space last September, when it revealed that it would be joining forces with the Bank for International Settlements Innovation Hub, Reserve Bank of Australia, Monetary Authority of Singapore and South African Reserve Bank to test the use of central bank digital currencies (CBDCs) for international settlements.

Dubbed “Project Dunbar”, it aims to develop a prototype for a shared platform for cross-border transactions using multiple CBDCs, which will allow financial institutions to transact directly with each other in the digital currencies issued by participating central banks.

This will eliminate the need for intermediaries and reduce the time and cost of transactions, says Bank Negara.

Luno Malaysia country manager Aaron Tang says the multi-CBDC shared platform has the potential to leapfrog the legacy payment system and serve as a foundation for a more efficient international settlement platform. “Furthermore, the project aims to spur greater public-private collaboration to enable fast and frictionless cross-border payments, combining the benefits of distributed ledger technology and the efficiency of a common platform.”

Deputy Finance Minister II Yamani Hafez Musa, however, told parliament last month that the central bank had no immediate plan to issue a CBDC as the domestic payment systems, including the Real-time Retail Payments Platform, continue to operate securely and efficiently in supporting economic needs while enabling real-time digital payments.

Bank Negara has said it will actively assess the potential value proposition of a CBDC in the light of developments in the digital assets and payments space.

“Key policy decisions on a CBDC will be guided by clear benefits to Malaysia as a whole, while ensuring that the associated risks arising from CBDC issuance, particularly financial stability risks, are effectively managed. CBDC issuance should complement existing payment instruments, including physical cash, to ensure that all Malaysians, in particular the underserved communities, have continued access to safe and efficient payment solutions,” the central bank noted in its 2020 annual report.

“We will also actively monitor the trend of key indicators with direct impact on our mandates, which may provide useful data points for us to evaluate the merits of CBDC issuance. These include, among others, the level of physical cash usage in Malaysia, the extent to which privately issued digital assets are used for payments in Malaysia, and the extent to which CBDC is being used to facilitate cross-border trade.”

Tang says CBDCs have been touted as a way for governments to improve financial processes and audit trails to ensure that people and companies are paying their taxes as well as delivering real-time payments and transactions.

While CBDCs may have their own use cases, they ultimately bolster the need for truly decentralised cryptocurrencies such as Bitcoin and Ethereum, he adds.

“Being independent of centralised entities, Bitcoin and Ethereum are protected from private and political influence. It is this fundamental differentiation that will drive mass adoption of cryptocurrencies as it becomes clear how they can help create a fair, inclusive and sustainable financial system for all,” says Tang.

While declining to comment whether Bank Negara should issue the digital ringgit, he notes that it is important to remain aware that introducing this technology will not come with a one-size-fits-all action plan and central banks should proceed with caution to mitigate any risks pertaining to their economy’s stability.

“Having said that, we fully support cooperation and interaction between government-issued currencies and cryptocurrencies. If more major central banks issue their own digital currencies, we will view this as a significant step forward,” he says.

 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share