Digital ringgit? Not so fast

Rakuten's Lau said it might be too soon for many countries to implement CBDCs as they are adopting a wait-and-see attitude. — Bloomberg

PETALING JAYA: Despite Bank Negara having reiterated, in its Financial Sector Blueprint 2022 to 2026, that it has no immediate plans to launch a central bank digital currency (CBDC) last year, a discussion about it has regained momentum this week.

This is primarily in conjunction with Putrajaya’s launch of the National Digital Identity or Digital ID for Malaysians which saw Prime Minister Datuk Seri Anwar Ibrahim becoming the first person to obtain a Malaysian digital identification last Friday.

The rollout has raised curiosity among certain quarters, as to whether the country’s adoption of digitalisation will mean the CBDC could be on the horizon, especially with the central bank having acknowledged it has embarked on a multi-year CBDC exploration through a proof-of-concept (POC) roadmap.

CBDCs are a form of digital currency issued by a country’s central bank, which are similar to cryptocurrencies such as bitcoin, except that its value is fixed by the central bank and equivalent to the country’s fiat currency or paper money.

According to Investopedia, fiat money traditionally came as banknotes and coins, but technology has allowed governments and financial institutions to partly replace these physical money forms with a credit-based model that records transactions digitally.It is significant that some countries – including China – have experienced a major drop in the use of physical fiat money, and that trend accelerated during the lockdown era of 2020 and 2021.

Rakuten Trade head of equity sales Vincent Lau said it might be too soon for many countries to implement CBDCs as they are adopting a wait-and-see attitude, with most are still at the POC stage.

“The resurgence in the price of bitcoin over the past year has reignited interest in the digital currency sphere, coupled with the United States having issued an executive order recently to set new federal standards for the regulation of artificial intelligence, which could have spillover effects on cryptocurrencies,” he told StarBiz.

Recognising that CBDCs could mean a greater degree of traceability – and indirectly control for central banks in the public’s monetary transactions – Lau is of the opinion that as such, cash will always have its role in society.

“While the use of cash has suffered a drop-off in many parts of the world, we do not think it will be phased out completely because it still represents a very useful payment option that everyone uses,” he said.

Meanwhile, economist, cryptocurrency expert and Centre for Market Education (CME) affiliate Emile Phaneuf opined that CBDCs had accelerated in development as a reaction to Meta Platforms Inc’s attempt at launching its own currency libra, which was rebranded as diem in 2020.

Explaining matters from a wider perspective in a paper titled A future world monetary order, Phaneuf reckoned that the ultimate goal of the CBDCs is to move ledgers away from commercial banks and eventually have them sit on a single ledger of a central bank.

As such, this implies unprecedented levels of centralised power in the hands of central banks and their respective governments, he said.

As recently as July, in an article with the American Institute for Economic Research, Phaneuf detailed that risks of a CBDC implementation include the loss of financial privacy, easy seizure of assets, loss of the ability to resolve problems at a local level with a commercial bank, as well as outright prohibition on spending or purchase limits with certain merchants or products.

Perhaps most importantly, he pointed out it is the possible paradigm shift from money as an exercise of economic freedom to one of social engineering by central banks and their respective governments. “The latter could manifest itself in various ways, including negative interest rates, the expiry of one’s money with a date determined by the issuing central bank or its government, or even discouraging the consumption of products that do not toe a certain agenda,” he said.

At the same time, CME chief executive Carmelo Ferlito, echoing Lau’s statement, said the choice for the public to utilise cash should always be maintained.

He said it was unfortunate that the global lockdowns of the past three years, including the movement control orders, had accelerated the belief that handling cash will elevate the risk of one contracting viruses.

“This idea will increase the speed of the adoption of digital currencies, which could lead to governments or central banks taking control over the public’s spending decisions,” he noted.

A banking analyst with a local research firm said CBDC would provide a range of benefits and disadvantages to the financial system, as they have the potential to enhance payment efficiency, improve financial inclusion, as well as increase security and transparency.

“They also take away the necessity of having to carry cash. But they also undoubtedly present risks such as privacy risks, and technological challenges,” she said. It is essential to consider the benefits and drawbacks of CBDCs, as with any new technology, which means the authorities and financial institutions must work together to combat the issues, according to her.

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