Stability key as Asia moves towards a sovereign digital currency model

October 5, 2021

HONG KONG - Ratings agency Standard and Poors believes Asia-Pacific monetary authorities will likely continue to partner with commercial banks if, and when, they roll out central bank digital currencies (CBDCs)."Central banks will likely lean toward a model where banks and other financial intermediaries continue to play a strong intermediation role, rather than one where central banks alone manage their digital currencies," said S&P Global Ratings credit analyst Gavin Gunning.

CBDCs are a digital payment instrument, denominated in the national unit of account, that is a direct liability of the central bank.

 The People's Bank of China is one of the few central banks to already trial a CBDC for general purpose use by the public. Monetary authorities are also looking into technology to conduct wholesale financial transactions, via CBDCs.

Gunning said he believed the choice of design for CBDCs would be heavily influenced by the paramount objective of keeping financial stability. "Central banks will ultimately want to avoid significant disruption, and avoid unintended consequences."

The S&P report said that, in Asia-Pacific developed markets, approaches were diverse and well-progressed. In tech-hub Singapore, the monetary authority recently concluded its five-year digital currency project.

"Collaborations abound elsewhere, including in Japan with other major central banks, including those in the eurozone; in Hong Kong with Thailand and others; and in Australia, where the central bank is partnering with two major Australian banks and the U.S. developer of the Ethereum blockchain," the report said.

In many emerging market banking sectors in Asia-Pacific, cash in circulation continued to be high despite the rise in digital payments. This was due in part to these markets, including China and India, housing a large chunk of the world's underbanked population.

"We believe central banks in the region's emerging markets may tend toward a model that assists in providing inclusive access to the underbanked or unbanked population," said S&P Global Ratings credit analyst, Harry Hu.

"The model and technology employed will also need to consider hindrances, however, such as low internet and mobile phone penetration and potential power outages. This could pose challenges for expansion, especially in rural areas."

"CBDCs could potentially strengthen public authorities' control over fiscal policy, for example by making benefits payments direct to end-users allowing more precise benefit allocations, and by facilitating closer oversight compared with cash.

"Our current view is that CBDCs would not, for the foreseeable future, be likely to replace cash, but would act as an additional tool for its provision to the public.

"The extent to which stronger control over fiscal policy may be beneficial to the economy is unclear, noting that commercial banks are the long-established intermediaries between savers and borrowers, and between public authorities and benefit-recipients.

"Ultimately, weaker banks would likely be unhelpful for the economy."

China first began its retail CBDC pilot trials in 2020, with more slated. Just last month, the People's Bank of China outlawed all crypto-related activities.

"In part, we believe this measure to thwart cryptocurrencies is likely to facilitate a smoother pathway for the proposed launch of the digital renminbi in China," Hu said.

"We don't see signs yet that other major central banks in the region will follow this move which, in China's case, was preceded by a number of public warnings against digital tokens." (ATI).