Asia’s central banks engaged in a flurry of collaboration initiatives during 2021, as many established reciprocal agreements involving domestic payments schemes. The increase in cross-border payments projects emerged from the Association of Southeast Asian Nations (Asean) Payment Connectivity initiative, which launched in 2019. Under the agreement, the 10 member countries agreed to advance interoperability for QR code payments and real-time remittances, to achieve cross-border real-time retail payments by 2025.
The Monetary Authority of Singapore (MAS) and the Bank of Thailand (BOT) led the group with an agreement in April 2021. Heralded as the first linkage of its kind globally, connecting Singapore’s PayNow and Thailand’s PromptPay real-time retail payment systems will enable customers to transfer funds of up to S$1000 ($742) or Bt25,000 ($754) each day via their mobile phones. Transfers are completed within minutes, rather than up to the two working days seen previously. Importantly, MAS has indicated that other agreements will likely follow. According to an MAS spokesperson: “We will further pursue such linkages with like-minded counterparts, with the goal of eventually establishing a network of linked retail payment systems across Asean and beyond.”
Since the MAS and BOT agreement, other central banks in the region have followed suit with several varied projects. For example, Bank Negara Malaysia (BNM) announced six projects from June to November 2021, ranging in scope from linking with the BOT to promote QR code payments for customers and merchants through DuitNow and PromptPay, to renewing the bilateral currency swap agreement with the People’s Bank of China (PBOC). BNM and BOT also implemented a local currency settlement framework to facilitate the settlement of trade and direct investment between the two countries. The framework includes a foreign exchange (FX) policy and simplified documentation to facilitate transactions.
In addition to cross-border real-time payments, Asian central banks have been involved in the global development of central bank digital currencies (CBDCs). As a spokesperson for BNM explains: “To spur technological advancement in finance, BNM took part in global projects with other central banks, such as ‘Project Dunbar’ and ‘Project Nexus’, during 2021.”
In Project Dunbar, BNM worked with the Reserve Bank of Australia, MAS and South African Reserve Bank, in collaboration with the Bank for International Settlements (BIS), to work through the implications of using CBDCs, including governance and jurisdictional boundaries. Project Nexus operated similarly and brought in the Bank of Italy as part of the test process.
The digital realm
The development of digital currencies by private sector players, such as cryptocurrencies like bitcoin, has accelerated digital money experimentation among central banks. China was the first nation in the region to pilot a digital currency, launching its digital yuan trials in 2019. As part of this testing phase, in December 2020 PBOC’s CBDC was accepted by online retailer JD.com, which went on to use the currency to pay salaries to some staff. More recently, the e-commerce giant reported that more than 100,000 customers used the digital yuan to make purchases during its Singles’ Day shopping promotional period from October 31 to November 11, 2021.
In light of China’s advances, other countries across Asia have taken on the challenge of developing their own CBDC. Jason Ekberg, partner in corporate and institutional banking at Oliver Wyman, says: “You have central banks, such as the PBOC, leading the charge through their CBDC network along core corridors in south-east Asia and setting the standards. The private sector is also developing infrastructure, at a much faster place. I think the confluence of all these pilots that have been taking place is that there will be an accelerated pace of developments in 2022, as the cases are validated.”
Cautious by nature, central banks have focused on specific areas of the market. According to Willie Tanoto, director of Asia-Pacific financial institutions at Fitch Ratings: “In initiatives like payments and market infrastructure, where having interoperable standards is key, it is easier for central banks to come together and carve a path forward as they’re aiming towards a common goal. Whereas, if it is in developing a new product area, such as green finance or cryptocurrencies [like bitcoin] where building critical mass early is a competitive edge, it can be more complex and there may be pockets of hesitancy.”
The demand for CBDCs may rise as other forms of digital currencies fall foul of regulators. In Muslim countries, including Indonesia and Pakistan, cryptocurrencies have been ruled as against Islamic principles. They have been banned in Indonesia and Pakistan looks to be following suit. Should this stance be further adopted across the region, Brunei and Malaysia might also look to prohibit cryptocurrencies.
Despite the trepidation around private cryptocurrencies, many emerging markets seem to be drawn towards CBDCs. Chia Tek Yew, vice-chairman for Singapore and head of insurance for Asia-Pacific at Oliver Wyman, says: “The emerging countries will be looking at CBDCs for different reasons, mainly as large parts of their population are underbanked. CBDCs … will have that leapfrog effect for micropayments and digital wallets. And rather than doing the whole journey themselves, the countries will look at partnering with a fintech to introduce a CBDC at a retail level. The use case for these markets will be cross-border payments, such as migrant workers making remittances.”
Reducing the cost of remittances is something that interoperable CBDCs is expected to deliver and would have a significant impact on these economies. The October 2021 BIS working paper ‘What does digital money mean for emerging markets and developing economies?’ stated that low-value cross-border payments in emerging markets globally amounted to $551bn in 2019. However, the contraction in correspondent banking networks is driving up costs, with the report showing a 20% decrease in active correspondents in Asia between 2011 and 2018. CBDCs are seen as an alternative that could cut out the intermediaries in cross-border transactions.
Technical questions
As they explore CBDCs, central banks need to agree the parameters as to how digital currencies operate. This is a decision that needs to be made across jurisdictions, as standards will need to be agreed to ensure interoperability. Central banks, therefore, need to work together to address complex technical and monetary questions.
Oliver Wyman’s Mr Ekberg says: “There are dimensions to this which could be disruptive. For example, in China, there is a two-tier system where the central bank issues through commercial banks and a clearing bank manages the CBDC interactions between commercial banks and the central bank. In other markets, the central bank itself is functioning as the issuer [and clearer]. For these central banks, there is speculation that liquidity, ie M1 [cash in circulation and private bank deposits], is going to is going to [contract to] M0 [cash in circulation issued by the central bank]. When M1 starts going to M0, it takes liquidity out of the system.”
He continues: “Under the technical dimensions, there are questions around who is responsible for minting and issuing the CBDCs. Who is responsible for onboarding and offboarding? How do we manage finality, meaning when is a payment completed and when it can still be recalled?”
How CBDCs are stored and transacted also needs to be decided. Many central banks are currently weighing up the benefits of running their CBDCs on the blockchain; to date, China is not, although other countries are exploring the option.
The advantage of using blockchain technology to underpin a CBDC is that money then becomes programmable, according to Mr Ekberg. “This means the money can have set business rules applied to it, such as if liquidity rates are too low it can be moved to another jurisdiction. Or if FX becomes volatile, it can be shifted to a new FX pair. The central banks need to decide if they allow the private sector to drive this, or if they start embedding programmability [in their CBDCs].”
Corporate involvement
Ultimately, end customers need to be able to use CBDCs. The Oliver Wyman report ‘Unlocking $120bn revenue in cross-border payments’ highlighted the importance of central banks involving end-users in any decision-making.
The real beneficiary from a CBDC will be the corporate users, and they need to get involved in shaping the process today
“The real beneficiary from a CBDC will be the corporate users, and they need to get involved in shaping the process today,” says Mr Chia. “I think there is still a lack of understanding as to what it means for them and how much it will impact them when it progresses from an experiment into the norm in banking.” With the 2025 deadline for cross-border real-time payments laid out by the Asean members, the creation of this new norm may not be far off.
Any developments from the central banks also needs to take into consideration how closer ties may impact various areas of the banking sector.
“Central banks are also having to think more broadly of the ecosystem, such as the FX providers, and the fees banks make. They don’t want to inadvertently harm parts of the banking system,” says Mr Ekberg. “That’s why you see central banks actively engaging the private sector.”
While some areas may be negatively hit, for others it opens up a new wave of opportunities. Having a fully digital currency that can be used between jurisdictions could be a boon to intraregional business flows.
“One other potential benefit of the development of the regional payments ecosystem is it also facilitates the growth of Asean’s cross-border digital services trade and e-commerce,” says Nishad Majmudar, an analyst at Moody’s.
The MAS spokesperson adds that there are great possibilities for innovation. “Given the role of payments connectivity as an enabler to facilitate and unlock greater cross-border trade and e-commerce, the establishment of a direct linkage could also drive industry players to innovate new business models that capitalise on this new cross-border payments superhighway.”
In addition, it could provide increased revenue streams for governments. “Over time, governments, such as those of Vietnam and Malaysia, are keen to leverage this growth of digitised payments to better track cross-border digital trade and adjust their tax regimes to collect more revenue from such activity,” Mr Majmudar adds.
AML and KYC
While digital currencies are helping new payments experiences to emerge, they also have the potential to provide regulatory bodies with greater insight and oversight of payment flows.
Christian de Guzman, senior vice-president at Moody’s, says: “Greater transparency would aid in the wider emphasis currently on anti-money laundering (AML), while the development and integration of the underlying infrastructure for electronic payments paves the way for a more vibrant regional ecosystem for fintech.”
There has been much discussion around how AML and know-your-customer checks are managed cross-border, with central banks exploring whether they should set up central utilities or leave it to the commercial banks. Certainly, having bilateral agreements in place helps central banks maintain oversight as to their domestic banks’ activities in other countries, aiding them in their own AML.
Mr Tanoto explains: “By coming together, the central banks can co-operate on a common framework, and attempt to both reap financial synergies and manage associated risks. Singapore’s banks have over half of their loan portfolio located outside of Singapore, and the largest Malaysia and Japanese banks have over a third located overseas. Knowing what banks under your supervision are doing overseas is important, and corroboration from a counterpart in these markets certainly helps with oversight.”
Meeting in the middle
One issue that needs greater clarity when moving forward with CBDCs and other digital payment initiatives is the privacy versus transparency conundrum, especially across borders.
The PBOC has stated it will take strong measures to prevent criminals from making use of its CBDC, and warned that a completely anonymous currency could prove attractive for money laundering and terrorist financing. Yet while the digital yuan will not be completely anonymous, in order to meet AML requirements, there will be some measures built in to ensure privacy. Third parties, including the PBOC and e-commerce platforms, will not be able to access the personal data of the CBDC users.
“CBDCs are not about anonymity, but traceability and transparency,” says Mr Ekberg. “There has to be data protection and a level of privacy around this. I think this will be a core issue when there are so many institutions involved.”
How the use of CBDCs continues to evolve over time remains dependent on the geopolitical situation and the level of trust between countries.
“As with any relationship, I think one should not extrapolate and assume that integration will continue in only one direction,” Mr Tanoto says. “Global trade tensions in recent years are a good reminder that globalisation is not a one-way street. And looking [at the level] below the central banks, [domestic] stock exchanges or banking associations, for example, could have a different agenda and could potentially be more protective on certain issues.”
