Sonia li

Aug 25, 2020

Stablecoin and CBDC: What about Asia?

Stablecoins are digital assets that are pegged to a fiat, a cryptocurrency or a commodity such as gold. Stablecoins are very appealing because they provide all the benefits of digital assets such as security, privacy, and instant processing while minimizing the price volatility. The best of both worlds.

When you look at the top five stablecoins (USDt, TUSDT, USDC, PAX, and GUSD), they are all issued by private companies and pegged to the US dollar. While there are opportunities to build stablecoins backed by other fiats such as the Euro or the Japanese Yen, the stablecoin landscape is dominated by the US dollar. In this piece, we’ll explore the stablecoin and Central Bank Digital Currency landscape with a focus on Asia, and the opportunities in public-private partnerships.

What does the stablecoin landscape in Asia look like?

There’s been an increasing interest towards stablecoins in Asia. However, they are often lesser-known than their American counterparts. Among the most well known projects in Asia is Terra. Terra is a payment network that is supported by several stablecoins. They issued a stablecoin backed by the Korean won called the TerraKRW (KRT).

Everex, a Thailand-based company, enables the application of stablecoins for peer-to-peer transfers, merchant payment settlements, and fiat to digital assets exchange. Everex issued the EVX, a utility token, and its own stablecoin (THBEX) pegged to the Thai baht. Yet, finding information on their stablecoin is quite difficult, and transactions on Etherscan date back to 2019.

Amidst the projects that seem to no longer exist, Trust Token released a stablecoin backed by the Hong Kong dollar called TrueHKD. Although their stablecoin backed by the US dollar is well known and widely used, finding data on TrueHKD is rather challenging. There are no charts on CoinMarketCap, Coingecko charts are empty, but there are some transactions on Ethercan. Sparkdex.HKD, also pegged to the Hong Kong dollar, gained momentum in 2019, but in March 2020, the company closed its operations.

Why are banks participating in stablecoins?

Unsurprisingly, banks also want to have a say in the stablecoin scene. But why is that? First of all, we wrote a few weeks ago that we believe banks need to adapt to the new entrants in the banking industry if they want to survive. We believe the same applies to new products if they want to stay relevant. Multiple central banks in the world have tried to stack up in the race of stablecoins, and more specifically, in the Central Bank Digital Currency (CBDC) one. While both are completely digital and rely on blockchain technology, there are some differences between stablecoins and CBDC. The latter is the digital form of fiat, and hence, part of the base money supply. Controlled by a public institution rather than a private one, its value can be determined by a combination of central bank monetary policies, the country’s economic performance, and forex trading.

Developing and using its own stablecoin or CBDC has a lot of advantages. When using a digital asset in a closed loop, there are no dependencies on payment intermediaries. The entity has full control of access to the network and its data. Payments are also faster, more efficient, and easier. E-wallets allow users to transact on the network and to store value without necessarily the need of a bank account. In terms of monetary policy, any change can be made in a fairly easy and fast manner because everything is digital. Hence, changing the money supply or interest rate for example can be made instantly with a minimal cost.

How are Asian banks participating in the race of CBDC?

The Mitsubishi UFJ Financial Group, the fifth largest bank in the world by assets, is the latest bank to announce the release of their own CBDC by the end of 2020. The MUFJ will be pegged to the Japanese Yen (1:1 ratio).

China’s central bank, the People’s Bank of China, issued in trial its own digital currency, also known as Digital Currency Electronic Payment (DCEP). A screenshot of the DCEP was leaked from the Agricultural Bank of China. China has shown throughout the years that digital currencies and blockchain technology are important to the country, putting the latter as a national priority.

South Korea, another digitally focused society, is also trying to stack up in the race. The Bank of Korea launched a CBDC pilot in March. And closer to home, the Bank of Thailand expressed interest in developing its own CBDC backed by the Thai baht. In June, they released a statement mentioning they will develop a prototype of the payment system for businesses using CBDC.

Can the public and private sector collaborate together?

Although this is a non-exhaustive portrait of the stablecoin and CBDC landscape in Asia, we believe there are opportunities for the private and public sector to collaborate together. A public-private partnership can leverage all participants’ competitive advantages. The central bank can leverage its level of trust while utilizing its experience in highly regulated environments. On the other end, the private sector can bring innovation and its experience in customer facing interaction. Moreover, using the private sector’s expertise can also limit costs and minimize the risks for the central bank (IMF, 2020BIS, 2020).

A few central banks have already mentioned their openness to collaborate with the private sector. The Banque de France opened a call for nominations to experience digital currencies, the Bank of Japan mentioned in a statement the public and private sector should collaborate together in building the next generation of payment systems, and the Bank of Thailand stated that it remains open to private sector engagements. These are only a few examples on how the private and public sector can collaborate together to build digital assets. As many Asian societies are already digitally focused and increasingly comfortable with digital payments and transactions, a wide adoption of stablecoins and CBDC in Asia would not be unforeseen. Ultimately, collaborations between the public and private sector can accelerate the drive to more cashless societies in Asia.