Crypto Currencies, Stable Coins, CBDCs and the Future of Money

Crypto prices have registered bullish trends in 2023, igniting the view that the ‘crypto winter’ is finally over.

It is the second quarter of 2023, and the global crypto market cap is at $1.12 trillion, recording a 1.4% gain in just 24 hours. The two most popular crypto coins, Bitcoin and Ethereum, managed to rise above $26,000 and $1800 respectively...

Today Bitcoin daily transactions has grown to approximately 509,159 transactions; an 85% growth in one year. This massive increase of Bitcoin transactions is a result of more businesses accepting Bitcoin payments as cryptocurrencies become more mainstream.

A lot of innovation is happening globally around cryptocurrencies, CBDCs and stablecoins, with more regulations expected around the crypto industry; which may also have a positive impact on crypto adoption. Project Sela by BIS innovation Hub Hong Kong, for example, aims at enabling payment service providers and commercial banks to provide CBDC services without cyber security threats. It’s a project that has potential to drive adoption of CBDCs.

Cryptocurrencies are gaining more mainstream acceptance in Asia and are increasingly being used in the payments sector. Asia is home to some well-established crypto businesses such as Crypto.com. Hong Kong is identified as a crypto hub while Singapore is experiencing an upsurge of companies dealing with crypto thanks to the low licensing requirements.

TripleA suggests that Asia will dominate the crypto space having the number of crypto owners rising to 260 million, double the figure in 2022. The general perception is that Asia is more open to innovation and recognizes the benefits and potential of crypto for the future of finance.

Keeping up with regulation

75% of 45 countries studied by atlanticcouncil.org are currently in the process of making significant changes to their crypto regulatory framework. New regulations might focus more on specific areas such as taxation, anti-money laundering, know your customer (KYC), customer asset protection, mining, and counterparty risk.

Between 2020 and 2021, cryptocurrency experienced massive growth in Asia and crypto transactions soared by about 706% in South and Central Asia. Crypto trades in Asia contributed to nearly half the global crypto trades, thereby attracting the attention of regulators. Currently, crypto regulations vary greatly across the different countries in the APAC region.

Crypto Regulation in Asia

China banned crypto mining due to energy consumption concerns and introduced their CBDC. Additionally, China introduced bans on crypto related activities including crypto trading. Similarly, Bangladesh banned crypto trading. Thailand and Singapore appear to have a milder approach to crypto regulations. However, both countries have more stringent restrictions around Anti-Money Laundering, Counter-financing terrorism (CTF) and licensing for crypto companies.

Indonesia, which recently experienced a 280% increase in crypto investors, has specific cryptocurrency legally recognized as trading commodities. Cryptocurrencies cannot be used as means of payment in the country and banks are forbidden from enabling crypto payments.

On one hand, cryptocurrencies introduce opportunities for innovation and financial inclusion. On the other hand it introduces new challenges, especially to regulation, including difficulty for regulators to monitor crypto for market manipulation, fraud and money laundering and volatility. Establishing a stable framework for crypto becomes a challenge.

Balancing Stability and Innovation with Regulation

One way of balancing stability and innovation is a flexible approach to regulation. For example, instead of regulating the technology, that is cryptocurrency and blockchain, the regulators can direct regulations towards the financial activities enabled by the technologies. Instead of regulating the cryptocurrencies, they can regulate the crypto exchanges and other custodians.

The Asia-Pacific region clearly demonstrates the potential for becoming one of the areas of the world where crypto can be adopted as a regulated currency. Countries in the region are developing regulations that favor innovation. For example, the Japanese government has a comprehensive regulatory framework developed for the crypto exchanges which covers KYC requirements and anti-money laundering obligations. Moreover, the FSA, financial services regulatory body, introduced a regulatory sandbox program that gives an environment for companies to test new innovative products and services. As a result, Japan has more companies embracing blockchain.

NFTs - more than a passing fad?

In 2021, a digital artist Beeple created an NFT that sold for USD 69 million; drawing public attention to NFTs. Gradually, people started realizing the potential impact of NFTs with utilities in business branding strategies especially in line with target audience. Now, the NFT market size is expected to grow at a CAGR of about 33% to USD 211.7 billion by 2030.

NFT is becoming more significant than ever before. Businesses across Asia, from the local businesses to the big brands, are building practical use cases around NFTs. Across Indonesia, Thailand and Philippines, artists, musicians, photographers, and poets are adopting NFTs and the blockchain to grow their businesses.

NFTs Use for Brand Awareness and Sales Growth

NFTs exploding in popularity with big fashion brands demonstrates the opportunities that utility NFTs bring to business. Coingecko reported that apparel and luxury goods had outdid all other sectors in NFT use with 37%of traditional brands launching NFTs between 2020 and 2022. In 2021, Alibaba’s Tmall launched an NFT based promotion, Singles Day, that allowed foreign brands such as Burberry, whose NFT edition of signature shark toy dressed in Burberry monogram print had massive sales; selling 750 NFT units in the first 30 seconds.

NFTs have provided a new channel for brands to engage with their consumers, increasing brand loyalty and creating a massive community around a brand. They are able to create unique product or service experiences for the customers accessed through NFT perks. Also, with NFTs the brands can track customer behavior which informs more on curating customer experiences. The onset of web3 and the metaverse will create even more opportunities for brand engagement and loyalty. For example, providing a virtual shopping experience where NFT versions of your products are available for testing.

NFTs Come with Challenges or Brands Too

Before capitalizing on the NFT trends, brands have to consider the risks that are introduced with it. Issues such as intellectual property rights, data protection laws, financial regulations around NFTs and environmental impact. You have to decide the level of rights the NFT buyers have and how to prevent unauthorized use of your brand. NFTs may have potential risks on data privacy, requiring additional compliance measures for data protection. The regulatory environment around NFTs and the crypto industry keeps changing which makes compliance a challenge. And if your brand emphasizes sustainability, it will be a challenge with NFTs because each ETH transaction emits about 146 kg of carbon dioxide. The same way NFTs are used to verify product authenticity, unauthorized NFTs can be used to prove authenticity of fake products. Unsuspecting customers may fall for it.

CBDCs Pick Up the Pace…

More than half of the world’s central banks are exploring and developing digital currencies. As of March 2023, 119 countries, that represent about 95% of the global GDP, were already exploring CBDCs.

Countries have diverse motives behind exploring CBDCs, financial inclusion being at the core of it. For example Thailand, which has 45% of its population still unbanked, is exploring CBDC for financial inclusion.

Beyond increasing financial inclusion, industry experts believe CBDCs have the potential to create great resilience for the domestic payments systems, leading to increased efficiency in payments, better access to money, transparency to transaction flows and lower transaction costs.

CBDCs are rapidly growing in the APAC region and this can be attributed to:

• The need for more financial inclusion in the region. APAC still records a huge number of under-banked and unbanked people. Over 70% of SouthEast Asia population are under-banked and unbanked.
• Cross-border commerce’s need for efficient cross-border payments. With the Regional Comprehensive Economic Partnership (RCEP) boosting cross-border commerce and trade among 15 countries, there is more demand for efficiency in payments.

A perfect example of a CBCD project built for cross-border payments is the mBridge project. Within the five weeks of its pilot program $22 million worth of transactions were executed. This was the first project enabling CBDCs to settle real-value, cross-border payments on behalf of corporations. It demonstrates the potential for CBDCs to make cross-border transactions more efficient and less costly.

• The need for regulators to protect consumers against risks that arise from crypto usage. Today, crypto plays a huge role in enabling fraud and money laundering. For this reason, the regulators have to safeguard the payments systems; this includes integration of CBDCs into cryptocurrency use cases, especially investments and payments.

Prudently designed CBCDs will have potential to offer more security, resilience, and lower transaction costs compared to stablecoins and other cryptocurrencies. In the digital securities markets, CBDCs have resulted in reduction of settlement risk. Automation through blockchain technology alongside a CBDC system can potentially eliminate trading risks and settlement risks.

The Hong Kong Authority reported that CBDCs can work together with stablecoins. The appropriate suggestion given is of having CBDC-backed stablecoins. The issuance of digital currencies brings about issues of economic stability. And introducing CBDC-backed stablecoins is aimed at solving the stability issue. It will mirror the existing currency system in Hong Kong, where three financial institutions issue physical bank notes which are backed by the central bank. IN this case CBDCs would be the central bank’s direct liability while the stablecoins would be the liability of the issuing banks. This will be a regulated stablecoin, solving the risks of using unregulated stablecoins and volatility experienced with other cryptocurrencies.

Conclusion

We have seen crypto move beyond an investment tool to widespread use in other areas of business and transactions. The 2022 ‘crypto winter’ ushered in an era of requiring more controls, transparency and risk management. Countries across the world will continue making critical decisions on crypto regulations. Asian countries are handling crypto regulation differently. While Hong Kong’s goal is to expand retail access to crypto, Singapore plans to introduce tighter regulations. NFTs and the metaverse are expected to come back up with a bang. In the next few years, we expect NFTs will have a more permanent and pervasive role in digitization with use cases in education, healthcare and enterprises. With 80% of the world’s central banks exploring CBDCs, 2023 may be the ‘year of the CBDCs’. Commercial banks are also interested in the crypto space and may start partnering more with the central banks. The payments and currencies world is on a path toward more widespread adoption of blockchain technologies and innovation, which is necessary for further development of the Fintech sector.