SINGAPORE - The payments system is a public good and therefore needs to be regulated, interoperable and safe. It must also have the needed transparency to avoid the risk of money laundering and illicit finance.
At the same time, it is in the interest of a vibrant, competitive and efficient payments system to have diversity. While central bank digital currencies (CBDCs) are being actively explored by many countries, they should not aim to crowd out private providers of digital wallets, tokens and stablecoins as they are an important source of innovation.
Senior Minister Tharman Shanmugaratnam made these points on Thursday (Jan 28) at a panel on the topic "Resetting digital currencies" at the World Economic Forum (WEF) Davos Agenda 2021, a week-long series of virtual sessions to discuss global issues which will feed into the WEF special annual meeting scheduled to be held in Singapore in May.
His remarks followed fellow panellist and Tsinghua University National Institute of Financial Research chairman Zhu Min's comments, on China's experience in developing a CBDC.
The country is moving closer to becoming the first in the world to launch a CBDC, with political leaders in Beijing, Shanghai and Guangdong making commitments to offer new pilot programmes this year for the Digital Currency Electronic Payment (DCEP), as the digital yuan is officially known.
It is not a foregone conclusion that most central banks will issue either wholesale or retail CBDCs, said Mr Tharman.
The fundamental issue they are responding to is the rise of e-commerce and its upending of many industries. "E-commerce is now a major force, and the old world of currency has to catch up with this new reality," he said.
Formidable non-bank players have emerged in countries such as China, which has led to concerns about their market power.
"Network effects lead to the leaders getting larger, but these are typically closed-loop ecosystems, or walled gardens," he said.
"What we want to do in the interests of a vibrant, competitive and efficient payments system is to restore biodiversity."
Governments must make sure that their CBDCs do not entirely crowd out alternatives such as stablecoins and digital tokens, he added. Their aim should be to allow or ensure a competitive but regulated landscape, and "not to pick which horse is going to be the winner".
"Also make sure (the CBDCs) avoid disintermediating the traditional banking system," he said, referring to the risks that commercial banks face during times of crisis, where there could be retail deposit flight into the perceived safety of CBDC accounts held in central banks.
"So think about the world we are moving into in hybrid terms - not one or the other between non-bank, private, stablecoin players versus the existing banks, or about the CBDCs displacing either of them.
"But regulation is going to be necessary; the payments system is a public good. We've got to ensure that we have interoperability, we have safety, and we have the degree of transparency that is needed, including digital identity, that is necessary to business and finance."
During the session moderated by CoinDesk chief content officer Michael Casey, Mr Zhu did not give a timeline for the digital yuan to be adopted, but said that while trials had been conducted for its use in retail payments, this could be expanded to cover salary payments to civil servants, support for small- and medium-sized enterprises, and medical subsidies to the needy.
"So you can imagine its many uses to improve the efficiency, accuracy and transparency (of payments) as well as the public policy transmission mechanism," he said, adding that China aims to expand the scope of digital yuan applications and test the system's accuracy and durability.
Overseas Development Institute chief executive Sara Pantuliano highlighted challenges to the adoption of digital currencies, especially in developing countries which have significant underbanked populations.
Digital payments systems can help reduce the gender gap in financial access, and facilitate safer and more convenient access to wages and remittances, she said.
One unresolved challenge is the integrity of different national systems, or monetary sovereignty, said Mr Tharman.
Citing the US dollar (USD) as an example of a major national and international currency, he said that whenever there is a hint of sovereign risk in some less developed markets, people start switching into USD.
"That traditional risk will become much more pronounced if you have a digital currency, because it will be that much cheaper and faster to switch from domestic currency assets into foreign currency assets," he said.
"It's an issue which we haven't begun to address, and it is one of the concerns we should have when we think about CBDCs, particularly if they are issued by major countries, especially the US whose currency is dominant."
