Tech innovation can take Asia's fintech to the next level

https://www.businesstimes.com.sg/opinion/tech-innovation-can-take-asias-fintech-to-the-next-level

THE past decade has seen a great deal of transformation in the financial services sector as it wades into digital waters, providing a range of new digitally-enabled services for consumers today. From the rise of QR-code enabled payments in China to sophisticated mobile banking interfaces in Singapore, Asian economies are setting the innovation agenda across the sector. With that, consumer-centred innovation appears to be at the heart of Asia's financial evolution.

In recent years, distributed ledger technology has enabled Internet-level exchange and trading of cryptocurrencies, which operate outside the traditional financial system. Volatile in nature, cryptocurrency issuers have taken to pegging the value of these tokens to fiat currency, stabilising their value and increasing their usability.

Whether in a bid to wrestle back control of what is traditionally their jurisdiction or as a push towards adapting to the changing times, 80 per cent of the world's central banks are now looking to launch their own state-backed digital currency. Critical research, promising pilots and calls for the implementation of central bank digital currencies (CBDCs) have emerged across diverse economies in the Asia-Pacific. What has catalysed this sudden rise, and what does this mean for the future of the region's financial ecosystem?

China's state-backed Digital Currency Electronic Payment (DCEP) project rose to the forefront of the global economic agenda last year. Though the People's Bank of China (PBOC) has conducted research into digital currencies as early as 2014, research and development efforts were fast-tracked following the announcement of Facebook's Libra in June 2019. With China's much-anticipated DCEP expected to launch this year, speculation has surrounded the country's recently enacted law that governs cryptographic password management and the role this might play for its digital currency.

China's lead in financial innovation should come as no surprise with one of the world's highest mobile wallet adoption rates at 64.9 per cent, followed by other Asian markets including India, Hong Kong and Taiwan. Conversely, the West has lagged behind, with a meagre 11.15 per cent rate of mobile wallet adoption in the UK and as low as 5.1 per cent in France.

In China's case, the overhaul of legacy systems has led to the dominance of digital payments, largely thanks to the amalgamation of social media, e-commerce, and banking by the likes of Alibaba and Tencent. With its centralised decision-making process and an emphasis on going cashless, China has been able to forge ahead with its plans for a digital yuan. Mu Changchun, director-general of the Institute of Digital Currency of the PBOC, said at the Singapore Fintech Festival last year that the DCEP was meant to be a hedge against the reliance of WeChat Pay and Alipay in the Chinese financial system.

While calls for a digital dollar were voiced at this year's World Economic Forum, the decentralised nature of the US political and legal system make for a complex web of laws and regulations, with multiple regulators at the federal, state, and local level.

What makes China's digital yuan so intimidating is the threat it could pose to the current dominance of the US dollar in global trade. One of the trump cards of the US's hold on the rules-based global order is the strategic use of cutting off non-compliant regimes from international trade. With ongoing economic and political tensions between Washington and Beijing, and increasing talk of bifurcating supply chains, the possibility of the yuan at the forefront of the global economy is causing trepidation.

Beyond China's influence, consumer habits continue to shift to the tune of a cashless future and the time for CBDCs appears closer than ever. While more enthusiastic about CBDCs than their Western counterparts, Asian regulators are also taking differing approaches in response to Libra given the fragmented economic landscape in the region.

WIDE-RANGING SPECTRUM

This spectrum ranges from tangible CBDC plans in the pipeline, to a more digital-first approach, to a wait-and-see approach depending on the outcome of Libra's eventual launch and the Libra Association's plans for currency governance.

Perhaps following in China's footsteps, emerging economies such as Cambodia and Thailand have been far more progressive in their explorations of CBDCs. Cambodia has already launched Project Bakong, a blockchain-powered, all-in-one retail banking and mobile payments application. With almost half of the world's unbanked population residing in Asia, technology can play an integral role in enabling greater financial inclusion. Remote communities lacking access to traditional banking facilities or countries with a low trust in their banking institutions may find CBDCs to be of greater utility.

Meanwhile, Asian juggernauts like South Korea argue that the ease and safety in the country's movement of money, with its advanced payment infrastructure, and the development of open banking and application programming interfaces (APIs) serve to negate the necessity for a CBDC. Others like Singapore adopt a more positive view, albeit one that limits the currency's use to internal institutional processes such as cross-border, interbank transfers.

The Monetary Authority of Singapore's work on Project Ubin best exemplifies this, having expanded beyond explorations into a tokenised Singapore dollar to a successful joint collaboration with the Bank of Canada which trialled cross-border and cross-currency payments using CBDCs. Other markets are in the middle - Japan is on the fence regarding a CBDC's utility within a developed economy while some lawmakers such as Kozo Yamamoto, a senior official in Japan's Liberal Domestic Party, have called for the inclusion of the digital yen in its mid-year key policy guidelines.

In the digitalisation era, governments have learned that technological innovation holds the key to unlocking influence and dominance on the world stage, as countries grapple with the incredible pace of change. CBDCs can take the fintech revolution to the next level by disintermediating layers of legacy systems, reducing costs and enabling new regulatory functions. In an age where the economic centre of gravity is shifting towards the East, CBDCs could well be the tipping point for a financial ecosystem already largely independent of the West.