The global trend of digital currency experimentation

Ahead of this month’s Singapore Fintech Festival, DBS became the first bank to go live on the Singapore Exchange’s new digital asset trading system MaxxDigital, which enables straight-through trading on a 24/7 basis.

Fifteen central bank digital currency (CBDC) pilots are now underway globally, but as yet, none of these experiments is operating to scale, whether focused on retail or wholesale markets.

“It's not sufficient to launch [a digital currency] and hope that the consumer will use it. There has to be a compelling consumer value proposition,” says Richard Gendal Brown, chief technology officer at fintech R3.

But declarations and experiments by central banks in creating digital currencies “may become less hot air and vapourware” in 2023, according to Steve Morgan, global banking lead at artificial intelligence software company Pegasystems.

“There is a sense of momentum growing as central banks from across developed and emerging economies seek to coordinate their plans. Some countries like India may take the lead here,” he says.

Simon Williams, associate partner at PA Consulting, says that positive developments are emerging in the US, Europe and parts of Asia, but he predicts the real breakthrough will be in capital markets. “This is evident in the upcoming pilots of the digital euro,” he says. 

“For global core payments infrastructure, central bank digital currencies provide the opportunity for streamlined, traceable payments that enable more straightforward application of anti-money laundering and sanctions monitoring,” adds Dr Williams.

Untapped potential

There have been mixed results for CBDC experiments, however. Carlos León, director of financial market infrastructures and digital currencies solutions at FNA, cites China and Nigeria as examples of live pilots at the two extremes of CBDC achievement – while around 95% of Chinese use digital payment instruments, some 36% of Nigerians do not even hold a bank account.

There is great potential for well-designed CBDCs to be a powerful tool for citizens, businesses and governments, according to Jason Lau, COO of crypto exchange Okcoin, who says early adopters are likely to raise their country’s economic profile and impact beyond their physical and digital borders. 

But, he warns: “The perils of a poorly crafted CBDC, particularly if stakeholders’ privacy concerns are unaddressed, could lead to low uptake in a population and even lead to the implementing country being leapfrogged economically by other countries.”

Lars Seier Christensen, chairman of the non-profit Concordium Foundation and founder of online trading specialist Saxo Bank, says he firmly believes that central banks and financial authorities will eventually embrace the blockchain economy. 

“I would not say we are on the verge of a full-blown breakthrough just yet, but many central banks are testing the waters and establishing projects and sandboxes,” he says.

CBDCs present a sturdy platform

Although unpegged cryptocurrencies such as bitcoin and ethereum have exploded on global financial markets in the last decade, their inherent volatility means that banks and governmental bodies want the assurance of lower risk before getting involved, according to Jorge Lesmes, banking director at NTT DATA UK&I. 

“CBDCs seem to be the sensible choice for these institutions because they are pegged to a fiat currency, which significantly reduces their volatility,” he adds.

Rhomaios Ram, CEO of Fnality, a blockchain-focused fintech founded by a consortium of global banks including Santander and Barclays, says current CBDC proofs of concept in the wholesale space indicate strong interest in novel, institutional-grade digital payment rails.

The recent introduction of the digital Singapore dollar under the Monetary Authority of Singapore’s Project Orchid solidifies expectations that CBDCs are becoming a viable alternative payment method, according to Nikhita Hyett, EU managing director of payments platform BlueSnap. 

“As Singapore is the top finance centre in Asia, and the third [largest] financial capital in the world, it holds a lot of influence,” she says, meaning that other developing Asian countries may look to emulate Singapore’s crypto pilot.

Peter Curk, CEO of crypto trading platform Iconomi, says CBDCs first need to catch up on stablecoins. “We hope that governments will not put unreasonable regulatory hurdles in front of stablecoins to slow them down as this would be a backwards attitude and hinder the evolution of a much-needed asset class for the global economy.”

There are still many questions to work through, not only whether there should be a retail CBDC in any given country, but exactly how it should work to address compelling consumer needs and be adoptable by the broader ecosystem.