Southeast Asia is home to some of the world’s fastest growing economies and is rapidly adopting digital financial technology, including blockchain-based solutions. Thus, it is only natural that central banks in the region are starting to think about a possible role for digital fiat currencies. The first country to make the jump to a CBDC is Cambodia, and it will definitely not be the last.
Try as it might, the cryptocurrency industry has not yet been able to shake its reputation for being not quite above board. The rebellious, underground side of crypto has won it many devoted fans – just not usually among financial regulators. But what if crypto – like many segments of Asia’s fintech industry – found a home in Singapore?
The crypto party may be over in South Korea, where the government is less than ecstatic about the widespread use of decentralized virtual currency in its economy. Unlike Japan, a crypto pioneer that has always been tolerant of decentralized digital currency, South Korea sees it as somewhere in between an annoyance and systemic financial risk. Seoul is now moving to curtail crypto’s influence in the country through strict regulation and higher taxation.
Bitcoin mining was one of the last vestiges of China’s experimentation with decentralized virtual currency. Until recently, China was the world’s bitcoin mining center. For the crypto faithful (and the agnostics who profited from mining), it was great while it lasted. But now regulators have decided mining in China should go the way of trading. Several weeks ago Kapronasia wrote that the crackdown was just warming up. Sure enough, provincial authorities are turning up the heat. What began in Inner Mongolia – it shut down 35 mining firms between January and April – has spread to Xinjiang, Qinghai and Yunnan.
It was only a matter of time before bitcoin mining landed in China’s crosshairs. Beijing identified decentralized digital currency as a systemic financial risk in 2017 – for its use in skirting capital controls and links to money laundering - and promptly hobbled key parts of the crypto ecosystem, shutting down all exchanges and banning initial coin offerings. Mining does not pose the same immediate risks to the Chinese financial system, but its enormous power usage could crimp Beijing’s efforts to curb its carbon emissions – a major central government policy objective. With that in mind, the prospects for bitcoin miners in China look dim indeed.
The hype about China's digital yuan can obscure the reality, especially in the cross-border space. The most adamant supporters of China’s CBDC argue that it poses a challenge to the US dollar’s role as the world’s dominant international currency because, well, it is digital, has a technological edge and thus will perhaps redefine global payments rails. This argument exaggerates the benefits of digitization while overlooking the fundamentals of the dollar's paramountcy.
China is leading the world in CBDC development, prompting speculation that DCEP (digital currency, electronic payment) is on its way to becoming the digital equivalent of the U.S. dollar. The reality is more nuanced. To be sure, China's digital fiat currency is at a more advanced stage than any other major country's CBDC, and China has many potential applications for it domestically. When it comes to cross-border use, however, many questions remain about the digital yuan.
To date, South Korea has been less enthusiastic about launching a central bank digital currency (CBDC) than China or Japan. Beijing leads the world in CBDC development while Tokyo sees a CBDC as a necessity to stay competitive with its giant neighbor. Yet Seoul is now coming around to the need for a digital fiat currency, even if one of the government's purposes in developing one is to reduce the use of crypto in its economy.
Korea's K bank may have finally found the secret sauce. Long a laggard among Korean fintechs, the country's first digital lender is now riding the bitcoin boom thanks to a tie-up with the crypto exchange Upbit. Under a deal K bank and Upbit reached in June 2020, retail investors who want to trade crypto with Upbit must do so through the digital lender. Since last March, Korea has required exchanges to work with lenders like K Bank to ensure the use of valid, real-name accounts for trading. Eager to capitalize on the bitcoin boom, retail customers are signing up at K bank in droves.
The crypto faithful are crying foul as India once again mulls banning decentralized virtual currency. They say pulling the plug on crypto now would be like banning the internet in the 1990s - a reactionary move that would have grim repercussions for India's economy. To be sure, some Indian investors would lose out if they could no longer trade cryptocurrencies. They currently hold about US$1 billion worth. The fintech startup ecosystem might be hurt. But it is hard to imagine the broader Indian economy suffering.
Japan has noticeably stepped up its bid to become an international financial center over the past year. The immediate catalyst has been Hong Kong's political troubles. Japan would like to attract international financial institutions and talent from Hong Kong, offering a more predictable and stable business environment. Yet Japan's biggest financial opportunity lies not in replacing Hong Kong, but rather in developing itself as Asia's premier cryptocurrency hub. Japan has a big head start over its competitors in this area. With perseverance, it can emerge ahead of both Singapore and Hong Kong.
Japan may be a cashless payments laggard, but it still plans to launch a central bank digital currency (CBDC). Tokyo's newfound interest in a digital yen derives at least in part from a desire to stay competitive with China. Beijing's launch of DCEP pilots this year showed that it was leaps and bounds ahead of other countries in the CBDC department. At the same time, a CBDC offers Japan a chance to accelerate the overall digitization of its financial system. Cash still accounts for about 73% of all transactions in Japan.
Cambodia has become the first country in Southeast Asia to launch a blockchain-based payment platform backed by its central bank. The Cambodian government is calling the platform, known as Project Bakong, a "retail central bank digital currency." Co-developed with the Japanese fintech firm Soramitsu, Bakong enables transactions in both Cambodian riel (KHR) and US dollars and works with Cambodia's existing payment systems. The Bakong app allows users with a Cambodian phone number and bank account to set up a digital wallet in either Riel or US dollars, transfer between accounts and make payments with a phone number or QR code.
U.S. regulators have always been ambivalent about blockchain technology and cryptocurrency. That translates to a lack of regulatory clarity for firms operating in the space. In the U.S., crypto could be a currency, property, commodity or security, depending which regulatory authority you ask. But for now, it remains in limbo. Frustrated with this situation, San Francisco-based Ripple Labs is considering packing its bags and relocating to Japan or Singapore, countries which have taken a more proactive approach to regulating cryptocurrency than the United States.
Facebook's virtual currency initiative is getting a much needed boost with the addition of Singapore's sovereign wealth fund Temasek to the Libra Association. Temasek is the first member based in Asia and brings the city-state's fintech prowess to the table. Over the past decade, Singapore has emerged as Asia's preeminent fintech hub. Its government has approached fintech as an enabler of a wider variety of financial services rather than a mere disruptor of the status quo. If Libra is going to succeed, it will need to move in that direction.
South Korea is eager to introduce more digital applications into its financial system, but unsure how far it wants to go with digital currency. That goes for not just crypto, but central bank digital currency as well. For now, payments is one fintech segment in which South Korean tech giants are poised to launch new applications.
Here comes China's blockchain bandwagon, ready or not. The novel coronavirus may have slowed the Chinese economy down, but now that life is slowly returning to normal, blockchain hype is back. China currently has about 35,000 blockchain companies, according to information portal Tianyacha. In Guangdong Province alone, there are 20,000 of them. Even amidst the coronavirus pandemic, more than 2,000 new blockchain companies were formed between January and March, according to Forkast News.
Unsurprisingly, most of these firms are not focused on distributed ledger technology. Research by Forkast shows that just over 500 of them have a state-issued blockchain service filing number. Without one of those, a company is not a certified blockchain provider in China. China's 01 Think Tank found that about 1,000 of 30,000 blockchain firms in China are engaged in business that uses distributed ledger technology.
Japan stealthily has become among the world's most pro-crypto countries. Amidst the boom and gloom that have defined the crypto space, Tokyo has avoided irrational exuberance or draconian restrictions on the use and trade of virtual currency. Instead, it has quietly incorporated digital currency into its existing financial system, linking it to the wider push to boost cashless payments. In Asia, no nation has been more consistent in its crypto approach. The next logical step would be to create a central bank digital currency. Japanese officials, however, have yet to commit to a CBDC. Pressure is mounting though, especially as China pushes ahead with its sovereign digital currency.
North Korea's growing nuclear program has long been a point of contention between the U.S. and China. Beijing prefers to handle its mercurial neighbor with kid gloves while Washington favors a tougher approach, namely economic sanctions. To evade sanctions in the digital age, Pyongyang has upped its hacking game. Both banks and cryptocurrency exchanges are victims. Digital currency offers North Korea a way to raise funds and do business outside the US dollar led global financial system. North Korea stole more than US$2 billion from both traditional financial institutions and crypto exchanges - including South Korea's Bitthumb - the United Nations said in an Aug. 2019 report.
The Trump administration has not shown much enthusiasm for a sovereign digital currency so far. With China's advances in the area, however, Washington's stance could be set to change. In early February, a member of the United States Federal Reserve Bank board of governors said the Fed is researching and experimenting with distributed ledger technologies and their virtual-currency applications. Among the applications being explored is a central bank digital currency (CBDC).
Lael Brainard, who chairs multiple Fed committees, made the remarks at a speech during an event on payments held at Stanford University. Brainard noted that 80% of central banks globally are researching CBDCs. However, she stopped well short of endorsing a full-throated campaign to create a digital dollar, devoting considerable attention to the challenges and risks posed by digital fiat currencies.
Much like its anti-corruption campaign, China's crypto crackdown is relentless. Beijing views decentralized digital currency as a conduit for money laundering and capital flight. In contrast, Beijing sees crypto's underlying blockchain technology as useful. Blockchain can help China boost its tech prowess, improve supply-chain integrity and surmount bottlenecks across many industries, particularly financial services.
It can be hard to cut through the hype surrounding Facebook's cryptocurrency project and evaluate it objectively. Facebook champions the Libra stablecoin as a powerful vehicle for financial inclusion which would be easily accessible to its many users in developing countries without a bank account. To advance the Libra project, Facebook chief executive Mark Zuckerberg has been playing up its nationalist credentials. If U.S. regulators fail to greenlight Libra, then Washington will cede digital currency ground to Beijing, he says.
"China is moving quickly to launch a similar idea in the coming months," Zuckerberg told the House Financial Services Committee in October. "If America doesn't innovate, our financial leadership is not guaranteed."
Misunderstanding of China's blockchain aspirations remain widespread. Virtual-currency enthusiasts once thought the Middle Kingdom would be crypto central. They were wrong: China doesn't want to be a hub for all things crypto, but it does want to harness the underlying blockchain technology to boost its technological prowess, improve the integrity of supply chains and overcome bottlenecks across many industries - notably the financial services sector.
It was with those goals in mind that Chinese President Xi Jinping recently called for a larger role for blockchain in China's economic development. According to state-run Xinhua, Xi urged "deep integration of blockchain with the real economy," which he said could help SMEs get better access to credit as well as strengthen risk management in banking and the supervision of government agencies. He further said that China has a "solid blockchain foundation" and called for the nation to accelerate the development of blockchain technology and strengthen related basic research.
Japan's biggest brokerages are moving to tap opportunities in the forthcoming security tokens market. From April 2020, Japan will permit fundraising through security token offerings, which have already been launched in the U.S., Singapore and Taiwan.
Australia Post is the first industry service provider to join the Australian government’s digital identity program and the second organization to be accredited under the Trusted Digital Identity Framework (TDIF) after the Australian Taxation Office. Alongside TDIF is the Australian government’s GovPass program. It allows individuals to verify their digital identity, which then can be used to access a range of government services. If success, the government's digital identity programs may be expanded to the financial services sector in the future.
The Japanese government is leading a global effort to develop an international cryptocurrency payment network similar to the SWIFT system used by banks, according to a recent Reuters report. Citing an anonymous source, the report said that the purpose of the crypto payment network would be to combat money laundering. No details have yet emerged about how the network would function, but it was reportedly approved by the Financial Action Task Force (FATF) in June.
Facebook's plans to launch its cryptocurrency Libra in the first half of 2020 have prompted a new round of discussions in China about the merits of virtual currency. If Libra, which is aimed at the enormous global market of 2.38 billion Facebook users (not including China, where Facebook is blocked), were to succeed and China had nothing comparable, it could be left behind in the next wave of digital financial innovation.At the same time, Beijing worries that Libra will further entrench the hegemony of the U.S. dollar. “If the digital currency is closely associated with the U.S. dollar, it could create a scenario under which sovereign currencies would coexist with US dollar-centric digital currencies,” Wang Hexin, research chief of the People's Bank of China, was quoted as saying by The South China Morning Post in a July report.
With the launch of its cryptocurrency Libra, Facebook is diving headfirst into digital banking. The U.S. social-media giant can draw on its massive global network of 2.3 billion users as it forays into finance. Yet Facebook will not be introducing Libra to China, which has the world's largest number of internet users. China blocked Facebook a decade ago and has moved to cripple crypto to control systemic financial risk and discourage capital flight. If Libra is a success, being excluded from it could have major ramifications for China's fintech development. At the very least, Beijing's own fintech system would be further isolated from the rest of the world.
The government of Indian Prime Minister Narendra Modi is not known as a friend of the crypto community. With his recent reelection, virtual currency's future in India, the world's second most populous country and its soon-to-be No. 3 consumer market after the U.S. and China, looks uncertain at best. At worst, India could flat out crypto and criminalize its possession and use.
China has a complicated relationship with blockchain technology. Until the fall of 2017, China was the largest market for Bitcoin. But Beijing ultimately couldn't tolerate the decentralized nature of virtual currency and its utility in allowing Chinese citizens to evade capital controls, or in some cases, launder money. The ensuing crypto crackdown may turn out to be much like President Xi Jinping's anti-corruption campaign: never-ending.It's now clear that China will not allow decentralized digital currency in its financial system.
Less than two years ago, China was the world's virtual-currency capital by trading volume. On the eve of the great crypto crackdown in September 2017, China accounted for 90% of the world's Bitcoin trading. Miners capitalized on cheap electricity rates in far-flung provinces to churn out as many digital coins as their power supplies permitted. Crypto bulls lauded Beijing's apparent embrace of distributed ledger technology and decentralization.
As it turns out, the celebration was premature. In a move to control what it perceives as systemic financial risk, Beijing has been gradually squeezing the life out of the China crypto market. The Chinese government has banned ICOs and the use of fiat currency in virtual-currency purchases as well as blocked related websites. Recently, it began working to eliminate crypto mining. At the same time, the WeChat super app banned crypto trading effective May 31.
The National Bank of Cambodia will become one of the first banks in the world to integrate blockchain technology into its national payments system in the second half of the year. The Cambodian government aims to use distributed ledger technology to strengthen banking system efficiency and boost financial inclusion in what is still one of Asean's poorest countries.
China may be the only country in the world able to stamp out cryptocurrency while repurposing its underlying blockchain technology. Decentralization becomes centralized under this scenario, as private enterprises implement blockchain solutions in line with central government directives. It's a bit like the "socialist market economy." The key to success here is acceptance of seemingly contradictory principles, one of Beijing's specialties.
Paradoxes abound in the Chinese economy, as the long arm of the state regularly collides with resilient entrepreneurial activity. Nowhere is this more apparent than the fintech segment, where Beijing is repurposing technology designed to facilitate freewheeling financial activity as an instrument of state control. We would like to ask enigmatic Bitcoin founder Satoshi Nakamoto to comment - if only we knew how to get a hold of him.