Asia’s cryptocurrency market is booming. As the region establishes itself as a digital powerhouse, it is also naturally leading in crypto adoption. And now, even Asia’s governments are getting in on the trend, leveraging blockchain technology to explore central bank digital currencies (CBDCs).
While no country in Asia has yet launched a fully operational CBDC, some 35 countries in the region are either already exploring government-backed digital currencies, in the process of pilot testing, or even on the verge of a full-scale launch.
As a result of governments entering the ring, competition in Asia’s digital currency space is heating up. Going forward, crypto-native firms will feel increasing pressure to communicate clear and distinct use cases to prove their own projects’ worth next to CBDCs. Not to mention, they’ll need to provide convincing proof of credibility when compared side-by-side with government-backed tokens. Both these aspects will be key if crypto-native firms are to survive for the long term.
Mainland China and Hong Kong Have the First-Mover Advantage
Hong Kong and Mainland China are among Asia’s first movers in terms of CBDC development and adoption. Their example is also potentially prompting other Asian countries to see the merits of such programs.
China is the furthest along the road to full adoption, with widespread trials of its digital renminbi already underway. The concept of electronic payments in China is already widely embraced through the likes of WeChat Pay and AliPay. In fact, these two payment giants have almost replaced cash entirely on the mainland.
China is now taking that digitalization to the next stage, and creating a significant advantage in its earlier adoption of CBDCs. That follows years of strategic investment in the underlying technology and expedited experimentation. The government has been using a lottery system to incentivise adoption as it rolled out pilots in targeted provinces and cities. For example, in the Beijing pilot in 2021, China gave out free wallets containing a total of over US$6 million in digital yuan. So far 260 million people have used eCNY in one way or another.
Meanwhile, Hong Kong has been experimenting using CBDCs for settlements in partnership with the UAE, Mainland China, and Thailand, in efforts led by The Hong Kong Monetary Authority. And in the fourth quarter of 2022, Hong Kong began testing out the e-HKD to pave the way for virtual currency use by the public for everyday expenses. This matches the city’s overall strategy to create a sandbox to test out retail crypto adoption and applications.
Asian Nations Are Seeing a Variety of Reasons to Jump on the CBDC Trend
Each country or sub-region has its own motivations for exploring CBDCs. And in fact, the diversity of the reasons behind these moves is even more proof this is a trend that is here to stay.
For Mainland China, it’s hoping the e-CNY will boost its currency’s global reach and strengthen the nation’s big-tech-dominated payment ecosystem. For Hong Kong, the city is playing catch up with its rivals to regain its title as the region’s preeminent financial hub. A fully-fledged CBDC would also offer a route to strengthening its payment system resilience.
The Philippines, Indonesia, and Vietnam are also taking their first steps along the CBDC development route. They’re building on the existing prevalence of financial smartphone apps in their respective markets, and aiming to digitalize remittances. For these countries, their hopes lie in upgrading their overall financial infrastructure, to expand financial inclusion among the unbanked or underbanked.
But in stark contrast, CBDC adoption is also being utilized in some regions to decrease demand for decentralized cryptocurrencies, such as bitcoin, and their perceived hazards. For example, South Korea plans to use CBDCs to reduce demand for an asset class that has led to significant losses for retail traders in the region, for example after the Terra/Luna meltdown.
CBDCs: A Trend That’s Here to Stay, and a Challenge to Crypto-Native Projects’ Current Dominance
There are myriad reasons Asian nations are exploring and even embracing CBDCs. Financial inclusion. Upgrading existing financial systems and payment infrastructure. Increasing the perceived stability, safety, and security of the digital asset ecosystem. While it’s positive that blockchain technologies are being embraced, the existing crypto ecosystem is not necessarily part of these governments’ plans.
Against this backdrop, crypto-native firms will have to push the boundaries of innovation to ensure they can complement CBDCs’ role. It is a critical time, in which focusing on ensuring security, efficiency and interoperability will be key. Trust must be gained. Attractive use cases must be communicated. Such use cases might be as an inflation-resistant store of value, a more versatile means of payment with no cross-border frictions, and/or providing elevated utility e.g. through tokenized real-world or in-game assets.
We’re at an inflection point, with Asia poised to lead crypto innovation. But it’s not a given that crypto-native projects will be leading the charge. As governments step up their adoption of blockchain technologies, the stakes have been raised for the whole digital asset ecosystem.
(By Henry Liu, CEO, BTSE)
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