ONE of the few benefits that Covid-19 has brought along is the acceleration of the structural shift towards digitalisation as measures undertaken by government’s across the globe focussed on minimising physical contacts to contain the spread.
Apart from the major shift in working from home arrangements, an area that has seen a strong growth momentum is payment systems.
Malaysia for instance, recorded a strong pick up in e-wallet adoption as consumers cut down on the usage of physical cash due to hygiene concerns, among others.
A recent study by tech research house Juniper Research founded that the number of unique e-wallet users will exceed 4.4 billion globally in 2025, up from 2.6 billion last year.
In Malaysia, statistics from Bank Negara showed that the number of e-money accounts jumped 37.38% in 2020 to 113.55 million accounts.
While the volume of transactions declined by 12.44% to 1.83 billion transactions last year, there was a notable increase in the value transacted by 62.64% to RM29.6bil.
The heightened interest surrounding the need for more seamless, convenient and inclusive payment systems has once again cast the spotlight on the central bank digital currency (CBDC) concept.
This has become more apparent after the Central Bank of Bahamas launched the world’s first CBDC in October last year, known as the Sand Dollar, being the digital version of the Bahamas dollar.
For starters, the Bank for International Settlements (BIS) defines CBDC as a digital banknote, which could be used by businesses to pay businesses, shops or each other, known as a retail CBDC or between financial institutions to settle trades in financial markets, known as a wholesale CBDC.
It adds that CBDC is also different from existing forms of cashless payment instruments for consumers such as credit transfers, direct debits, card payments and e-money, as it represents a direct claim on a central bank, rather than a liability of a private financial institution.
This type of riskless claim also makes CBDC different from cryptocurrencies such as Bitcoin or other private digital tokens.
Bank Negara, which also addressed the CBDC topic through a feature article in its latest annual report, said most digital assets (which Bitcoin is one), in their current form, are not used as payment instruments primarily because they do not exhibit the universal characteristics of money.
“In essence, their characteristics prevent them from being a good store of value and medium of exchange as they are prone to price volatility, vulnerable to cyber threats and lack scalability.
“For example, the price of Bitcoin recorded a steep decline of 39% within a single day in March 2020.
“Hence, it is crucial for the public to have a clear understanding of digital assets such as their features, underlying technology and corresponding risks, ” it says, adding that it is noteworthy that new forms of digital assets such as stablecoins, which seek to minimise volatility in their value by linking or backing it with assets such as fiat currency, have started to emerge.
As far as Bank Negara is concerned, it has no immediate plans to issue a CBDC but will actively assess the potential value proposition of CBDC in light of developments in the digital assets and payments space.
It says Malaysia’s current monetary and financial policy tools have remained effective in safeguarding monetary and financial stability.
The central bank adds that domestic payment systems, including the real-time retail payments platform (RPP) continue to operate safely and efficiently to support the needs of the economy and allow real-time digital payments.
“Key policy decisions on 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.
“As part of our efforts to enhance understanding of the associated risks and policy implications of CBDC, we are actively building internal capacity to support informed decisions on CBDC issuance including by conducting proof-of-concepts (POC), ” Bank Negara says.
This is in line with the general consensus among central bank leaders at the recently concluded four-day BIS Innovation Summit 2021 from March 22 to 25, that none were rushing to create one although research and experiments were gaining strong traction as it is a system that requires careful preparation.
Federal Reserve chair Jerome Powell reportedly said that there was no need to rush the project.
He has previously said that experiments with CBDCs were being conducted at the Board of Governors, as well as complementary efforts by the Federal Reserve Bank of Boston in collaboration with researchers at the Massachusetts Institute of Technology (MIT).
The most vital point of all, as pointed out by BIS general manager Agustin Carstens, is that the CBDC cannot fail at any particular point in time.
He said central banks are not approaching CBDCs as a race.
A BIS survey conducted with 65 central banks that was published in January found that 86% of them are actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects.
Among those currently at the pilot stage are the People’s Bank of China, the Eastern Caribbean Central Bank and Sveriges Riksbank, Sweden’s central bank.
Just on Wednesday, European Central Bank (ECB) president Christine Lagarde told Bloomberg TV that the institution could launch a digital currency if policy makers give the go ahead, but it will realistically take at least four years to do so.
The ECB will soon release an analysis of the 8,000 responses in a public consultation process on the potential launch, which will be sent to the European Parliament.